Rousselle Industrie SA, a manufacturer of machinery for paint manufacturers in northern France, nearly collapsed in 2020 after the pandemic disrupted its customers’ supply and businesses.
The 10-person company saved itself on the equivalent of $ 360,000 in loans under a government program that guaranteed deferred interest and debt payments for 12 months.
A year later, the company still faces repeated delays in supplies and payments, making the prospect of servicing debt difficult. Aware of the problems facing Rousselle Industrie and hundreds of thousands of other companies, the French government delayed loan repayments for another year.
“We would not have survived this difficult phase without the help of the government,” said Eric Plaisant, CEO of the company. “There is still a lot of uncertainty.”
Economies like the United States and China are recovering rapidly. But in Europe, where vaccination programs have lagged other regions and economies have been slow to adapt, companies continue to struggle. To avoid an avalanche of insolvencies and a new financial crisis on the continent, governments are expanding support measures.
“We don’t want to abruptly cut support and trigger tens of thousands of bankruptcies,” said French Finance Minister Bruno Le Maire.
In addition to delaying loan repayments, the French government extended the program by six months until the end of the year. So far, it has guaranteed $ 166 billion in loans for some 675,000 companies.
In Italy, Prime Minister Mario Draghi extended a moratorium on loan repayments for six months until December. In Spain, Madrid is forgiving some state-guaranteed loans.
Some of the measures will place a greater burden on governments, whose debt has soared since last year to levels higher than those seen in the sovereign debt crisis of 2011.
The pandemic crisis has been different from previous recessions. With the expectation of a large drop in economic activity followed by a rapid recovery once the virus outbreak was under control, Europe’s governments dumped the equivalent of $ 1.8 trillion in delinquent loans, state guarantees and grants to businesses to keep them afloat. They kept people in jobs by paying the salary bills. Countries like Germany even suspended rules that require companies that have run out of money to file for the local equivalent of bankruptcy.
As a result, unemployment remained low on the continent. Bankruptcies were even reduced. And the banks found little reason to take big losses on their loan portfolios.
However, that relative stability is based on the loan programs.
“If the phase-out of the measures currently in place is done too quickly, companies could be pushed to the limit,” said Martin Oehmke, a finance professor at the London School of Economics and Political Science, who co-chaired a report from Europe’s supervisor. financial stability report on the subject.
In the document, the European Systemic Risk Board said that in a worst-case scenario, in which support programs have only postponed problems rather than solving them, “the current low rate of insolvencies would be similar to the withdrawal from the sea. before a tsunami. “
If a tsunami hits, regulators fear banks are unprepared. Andrea Enria, director of banking supervision at the European Central Bank, warned that around 40% of eurozone banks have not properly recognized loans that are unlikely to be repaid. In fact, many have reduced the likelihood of default on new loans, despite the obvious risks.
“This is kind of a puzzle for us,” Mr. Enria said recently.
The biggest concerns are in southern Europe, which is more economically vulnerable, where banks are weaker and countries depend more on the most affected tourism.
In Italy, CNA, an association of small and medium-sized companies, found that more than a third of the companies surveyed said they could not start paying their loans regularly. In the tourism sector, less than 2% said they could survive without the moratoriums after the end of June.
“The extension of the moratorium is vital for me,” said Cristina Vincenzi, owner of a lingerie store in the northeastern city of Roncade. Ms. Vincenzi posted a loss last year after the pandemic forced her to close her store for months. Under the moratorium, he has not paid monthly installments of € 575 on his € 10,000 loan, which is roughly equivalent to $ 12,000.
In Portugal, around a third of all bank loans to companies are currently in a payment holiday period that expires in September. In the catering and accommodation sectors, the share is close to 60%, according to the Portuguese central bank.
Cristóvão Lopes owns a 170-room hotel in the southern Algarve region, which attracts sun seekers arriving on cheap flights from northern Europe. When the business plummeted 85% last year, a government leave program covered a portion of his workers’ wages, while he agreed to a small grant and holiday pay on more than half of his outstanding debt.
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In June, just as activity was beginning to pick up, the UK, its main source of customers, put Portugal back on a list of countries from which travelers should quarantine upon return. Cancellations followed. Lopes estimates that his business will only return to normal in 2023.
The moratorium on its debt ends in September, just as hotels enter the low season.
“We just can’t generate enough liquidity until then,” Lopes said. “You can’t expect companies to go from zero to 100% overnight.”
Portugal’s government has come up with a plan to intervene once the moratorium is lifted, guaranteeing some of the loans in exchange for banks providing more repayment breaks. That has its own risk: defaulted loans would become a government liability in a country where public debt, at more than 130% of gross domestic product, matches the levels it reached in the last decade.
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