The European Systemic Risk Board (ESRB) is cautioning that there could be an onslaught of insolvencies unless the European Union (EU) pivots from loan support to debt restructuring and other efforts to help companies stay afloat.
An ESRB report on Wednesday (April 28) outlined the grave risks to economic and financial stability if there is a large number of insolvencies in the coming months. Although financial instability has largely been avoided despite over a year of COVID-19-related restrictions, there is a real threat to the economy if looming insolvencies come to pass.
The ESRB, which is chaired by European Central Bank President Christine Lagarde, indicated that EU member states have to move from liquidity support to solvency support. It further stated that nonfinancial firms are faced with a tremendous amount of monetary strain as a result of the global pandemic.
The ESRB was established during the financial crisis in 2010 and is made up of ECB officials and financial regulators from member states.
Policies like debt suspensions, loan guarantees and public loans worked to stave off corporate insolvencies, but the reliance on such programs could accelerate solvency issues as companies took on more debt to stay afloat.
Corporate debt levels surged in many member states since the start of the pandemic and the “debt overhang increases the risk of a large wave of insolvencies and a protracted, slow recovery,” according to the ESRB.
The International Monetary Fund (IMF) said earlier this month that it expects that the European economy will rebound by 4.5 percent this year. Pre-COVID level output is expected to come back next year providing vaccines continue to be widely distributed.
Weak retail numbers in March, combined with high unemployment, have EU economists pointing to the possibility of a double-dip economic recession looming ahead. The fall in retail sales was steeper than the forecasted 0.3 percent drop economists had anticipated.