Economy: Opportunities through bankruptcies? Market shakeout offers prospects

Economy: Opportunities through bankruptcies?  Market shakeout offers prospects

In Germany, the number of company bankruptcies is increasing. Experts see this not only negatively. The development also creates space and resources for healthy companies. How great is the risk of infection?

In view of the increasing number of corporate insolvencies in Germany, banks and other creditors have to adjust to increasing defaults.

Creditreform’s head of economic research, Patrik-Ludwig Hantzsch, told the German Press Agency that the sum of 36 billion euros in damage to creditors last year should be significantly exceeded in 2023. The credit agency expects the situation to worsen in the coming months. But from an expert’s point of view, the bankruptcies not only have bad sides.

Market adjustment important

Economically, they would bring an important market shakeout, says Steffen Müller, head of insolvency research at the Leibniz Institute for Economic Research Halle (IWH). Data shows that insolvent companies are on average significantly less productive than companies that do not go bankrupt.

If they were kept alive, “sooner or later we would damage our overall economic productivity.” Since many promising companies are currently desperately looking for workers, it would be “particularly harmful” to keep weak companies in the market and tie up these important resources there, according to the expert.

The labor market has weakened somewhat recently and there are fewer vacancies. Nevertheless, socio-political justifications for saving jobs like in the 1990s and 2000s, which were plagued by mass unemployment, no longer apply today and are “out of date” in view of the great need for skilled workers. In addition, there are the factors of transparency and trust in creditors: In business transactions, it must be clear that the other party is actually solvent, said Müller.

Number of bankruptcies increases

Hantzsch also considers it economically “correct and important that the paradoxical insolvency events of the past few years are now normalizing”. “Far too many companies remained on the market that were not actually competitive” and that only survived thanks to excessive state aid during the corona pandemic – for example by suspending the obligation to file for insolvency.

However, the timing is now critical, explained Hantzsch. Many ailing companies are faced with an intensified competitive environment and a volatile market. “The “sudden” defaults in large numbers are becoming an existential problem for creditors, business partners and lenders,” says the Creditreform expert.

“So the current normalization is a double-edged sword.” The number of insolvencies is also likely to increase significantly in the coming months compared to the previous year. “But panic is still not a good guide,” says Hantzsch. At the time of the financial crisis in 2009, more than 33,000 companies were insolvent. “We are still a long way from these values.”

Construction industry badly affected

The construction industry is currently being hit particularly hard, as the initial conditions are particularly difficult due to the factors mentioned, explained Hantzsch. Higher credit costs, material and energy prices have made new buildings much more expensive. Recently, bankruptcies of several project developers caused a stir.

According to industry data, 11.2 percent more insolvencies were registered in the construction industry from January to May than in the same period last year, and in the main construction industry there were even 20.8 percent more insolvencies. 551 companies in the construction industry had to file for bankruptcy in the first five months of this year, after 456 in the same period last year.

“There are some companies that have not written a new order since the beginning of the year,” says Tim-Oliver Müller, general manager of the Main Association of the German Construction Industry. Although one comes from a phase of historically high order backlogs, “but that’s finite”. Above all, companies that had not managed to establish themselves in other market areas to compensate for the minus in residential and new construction would have a difficult time.

In order to take countermeasures, the association is demanding a package of measures from the federal government that, in addition to interest rate reductions, should also contain improved depreciation options for investors and investment subsidies for public companies, according to Müller. The high standards of energy efficiency are also not necessary in connection with the heat planning of the municipalities and the increasing share of renewable energies, “that has to be corrected”.

Warning of support measures

However, IWH insolvency expert Steffen Müller warned against premature intervention by the state. Especially in view of the high profits in the industry in recent years, help should be “very difficult to convey”, believes Müller.

In his view, support measures should only be considered if the construction industry is at risk of collapsing with the risk of contagion for other sectors of the economy. “I don’t see us there.” However, you have to take a closer look – after all, an “inflated construction sector” had earlier been at the beginning of major crises.

Based on preliminary information, the Federal Statistical Office registered almost a quarter (23.8 percent) more applications from companies for standard insolvency proceedings in July than in the same month last year. The increase from the previous months thus continued.

In the event of insolvency, according to Creditreform information, creditors in Germany only get back a low single-digit percentage of their outstanding claims on average – which, in case of doubt, is significantly better than a total loss, said Creditreform expert Hantzsch. Basically, an insolvency can also be a restart for a company. “If successful, the company can then better serve its obligations to creditors. Then the insolvency becomes a restructuring.”

Source: Stern

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