Germany haunted by the specter of zombie companies
Updates from the German economy
Sign up for myFT Daily Digest to be the first to know about German business news.
Concern is growing in Germany that a rule introduced as part of the country’s emergency response to the coronavirus will fuel the creation of thousands of so-called zombie businesses that could end up undermining the economy for years to come.
Under a government waiver introduced in March, German companies affected by the pandemic do not have to file for bankruptcy. The rule was to be removed at the end of September, but Justice Minister Christine Lambrecht wants to extend it until next March.
The idea proved controversial, however, with many arguing that it would be better to let weak companies go to the wall rather than keep them under artificial assistance.
Jan-Marco Luczak, legal spokesperson for Angela Merkel’s CDU / CSU, said the waiver was helping businesses that would be in trouble even without coronavirus.
“It is inappropriate to continue to keep the protective hand of the state over such enterprises,” he said. “It is neither in the interest of all the other players in the market, nor.. Of a company’s creditors.
Zombie companies are those that are unable, in the long run, to cover their debt service costs from their profits. The number of these “living dead” companies rose sharply in the decade following the financial crisis, as low interest rates encouraged them to take on debt.
But economists fear the problem has been exacerbated by the policy response to the coronavirus, which has seen governments spending billions on job retention programs, cheap loans to struggling businesses, and bailouts for those in need. large companies threatened with bankruptcy.
Advocates of free market capitalism argue that keeping businesses afloat with government subsidies prevents “creative destruction,” the process described by economist Joseph Schumpeter in which insolvent businesses that fail give way to better new entrants. health.
Evidence is emerging that this process has slowed down or even stopped in Germany. “About 550,000 German companies – or about one in six – are at risk of becoming a zombie company,” said Patrik-Ludwig Hantzsch, head of economic research at Creditreform, a trade data company.
Mr Hantzsch said the insolvency waiver had “too much” served its purpose. “It created a situation where companies benefit who don’t really qualify – whose business models weren’t working, corona or not corona,” he said.
Experts fear that the extension of the moratorium will destroy confidence in the market. “Businesses would constantly expect their counterpart to be in fact insolvent,” said Stephan Thomae, an opposition MP for the Free Democrats. An extension “would place a heavy burden on economic activity”.
This point of view is supported by business leaders. Henrik Follmann, managing director of chemicals company Follmann Chemie, said extending the waiver “is not a good idea – because confidence is waning. You don’t know who you’re dealing with.
“If a business is in financial difficulty, there are different ways to save it here in Germany, if it has good prospects for the future,” said Stefan Wolf, managing director of auto parts maker ElringKlinger. “If you are dealing with a company that ultimately goes bankrupt, that is a bad idea.”
The waiver has already had a marked effect. Germany is experiencing its worst post-war recession, as the economy contracted by more than 10% in the second quarter. Yet despite this, fewer businesses go bankrupt than in normal times. Since the waiver was introduced in March, the number of businesses filing for insolvency in local courts has fallen by more than 13% in April year-over-year and nearly 10% in May. The federal statistics agency says it expects a 29.1 percent drop in July.
This “seems to suggest that some companies may interpret the economic impact of the pandemic very broadly,” said Stefan Schneider, economist at Deutsche Bank.
The logic behind extending the insolvency moratorium is clear: 2021 is an election year, and neither party in government – Ms Merkel’s CDU / CSU group or Ms Lambrecht’s Social Democrats – wants to see an election year. wave of bankruptcies swept across the country at the same time as voters. at the polls, driving up unemployment and undermining economic growth.
Ms Lambrecht made it clear that the waiver would only be extended for companies that have become “over-indebted” as a result of the coronavirus crisis. “Unlike insolvent businesses, over-leveraged businesses have the ability to permanently avoid insolvency,” she said. “These companies should then be able to use the extra time to exhaust all possibilities for restructuring and refinancing. “
But some fear that an extension will simply delay the inevitable wave of bankruptcies. “It is unlikely that all companies that make use of this waiver option will be fully rescued,” said Manfred Stamer, economist at commercial credit insurer Euler Hermes. “Many of them will fail after the waiver has expired.” If the moratorium was extended, more insolvencies would simply be postponed to 2021, he said.
Deutsche’s Schneider also predicts that the number of companies going bankrupt will rise sharply after March if the waiver is extended. “But that’s not all: there could also be a domino effect, as even healthy companies are brought to their knees by the growing failures of their customers and business partners,” he warned.