Business

Debt burden increases as Europe extends corporate life support

Rousselle Industrie SA, a machine maker for paint makers in northern France, almost collapsed in 2020 after a pandemic disrupted supply and its customers’ businesses.

The 10-person company was saved with a loan worth $ 360,000 under a government program that guarantees debt and defer interest payments for 12 months.

A year later, the company still faces repeated delays in supply and payment, making debt repayment prospects difficult. Recognizing the problems facing Rousselle Industrie and hundreds of thousands of other companies, the French government has delayed the repayment of loans by another year.

Eric Plaisant, CEO of Rousselle Industrie, said the company couldn’t survive without government support.

“Without government support, we wouldn’t have been able to survive this complex stage,” said Eric Pleasant, CEO of the company. “There is still a lot of uncertainty.”

Economics such as the United States and China are recovering rapidly. But in Europe, where vaccination programs lag behind other regions and economic adaptation is lagging, businesses continue to struggle. The government is expanding its support measures to prevent bankruptcy avalanches and new financial crises on the continent.

France’s finance minister, Bruno Le Mer, said, “We don’t want to cut back on sudden support and cause tens of thousands of bankruptcies.”

In addition to delaying loan repayments, the French government has extended the program by six months by the end of the year. So far, $ 166 billion worth of loans have been guaranteed to approximately 675,000 companies.

In Italy, Prime Minister Mario Draghi has extended the moratorium on loan repayment by six months until December. In Spain, Madrid allows several state-guaranteed loans.

Some measures will put more strain on the government, whose debt has skyrocketed since last year, to levels above those seen in the 2011 sovereign debt crisis.

The pandemic crisis is different from the previous recession. In hopes of a significant decline in economic activity and a quick recovery after the virus outbreak has been curbed, the European government has invested $ 1.8 trillion worth of moratorium loans, state guarantees and subsidies in businesses. I kept them. They kept people at work by claiming salaries. Countries like Germany have even suspended rules requiring companies that have run out of money to file for local equivalents of bankruptcy.

As a result, continental unemployment remained low. Bankruptcy has also fallen. And banks have found little reason to make a big loss to their loan portfolio.

However, its relative stability depends on the loan program.

Rousselle Industrie is still facing delays in repeated supply and payments.

“If the current measures are phased out too soon, companies can push their limits,” said a professor of finance at the London School of Economics and Political Science in Europe. Martin Ohmke, co-chair of the report, said. Top financial stability supervisor on the topic.

In this document, the European Systemic Risk Board states, in the worst-case scenario where the support program simply postponed rather than fixed the problem: “

When the tsunami hits, regulators are afraid that banks aren’t ready. Andrea Enria, head of banking oversight at the European Central Bank, warned that about 40% of eurozone banks are not properly aware of loans that are unlikely to be repaid. Despite the obvious risks, many are actually lowering the probability of defaulting on new loans.

“This is like a puzzle to us,” Enria said recently.

The biggest concern lies in the more economically vulnerable southern part of Europe. There, banks are weak and the country is more dependent on tourism that has been hit.

In Italy, CNA, an association of small businesses, found that more than one-third of the companies surveyed said they couldn’t start repayment of their loans on a regular basis. In the tourism sector, less than 2% said they could survive without a moratorium after the end of June.

“The extension of the moratorium is essential to me,” said Christina Vincenzi, owner of a lingerie shop in the northeastern town of Roncade. Vinchange lost money last year after a pandemic forced him to close the store for several months. Under the Moratorium, she does not pay a monthly installment of € 575 with a loan of € 10,000. That’s about $ 12,000.

In Portugal, about one-third of all bank loans to businesses are currently on payment leave, which expires in September. According to the Central Bank of Portugal, the share of the restaurant and accommodation sector has skyrocketed to nearly 60%.

Christovaon Lopez owns a 170-room hotel in southern Algarve, attracting sun-seekers who take the shuttle on cheap flights from Northern Europe. Last year, when the business plummeted 85%, the government’s layoff program covered most of his workers’ salaries, and he had access to small grants and paid vacations with more than half of his outstanding debt.

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In June, just as activity began, his largest customer source, the United Kingdom, returned Portugal to the list of countries that travelers must quarantine on their return. Cancellation continued. Lopes estimates that his business will return to normal only in 2023.

His debt moratorium ends in September, just as the hotel heads for the off-season.

“Until then, we can’t create enough liquidity,” Lopez said. “You can’t expect a company to go from zero to 100% overnight.”

The Portuguese government has announced plans to intervene once the moratorium is lifted, guaranteeing a portion of the loan in exchange for further suspension of repayments by banks. It has its own risks. Unpaid loans are the responsibility of the government in countries where more than 130% of GDP’s public debt matches the levels reached in the last decade.

France guarantees approximately $ 166 billion worth of loans to approximately 675,000 companies, including Rousselle Industrie.

Write to Patricia Kowsmann (patricia.kowsmann@wsj.com), Giovanni Legorano (giovanni.legorano@wsj.com), Noemie Bisserbe (noemie.bisserbe@wsj.com)

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Debt burden increases as Europe extends corporate life support

Source link Debt burden increases as Europe extends corporate life support

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