Debt burden rises as Europe extends support for business life
Rousselle Industrie SA, a manufacturer of machinery for paint manufacturers in northern France, nearly collapsed in 2020 after a pandemic disrupted the supply and operations of its customers.
The 10-person company was saved with a loan worth $ 360,000 under a government program that guarantees debt and defers interest payments for 12 months.
A year later, the company still faces repeated supply and payment delays, making the prospect of debt repayment difficult. Aware of the problems that Rousselle Industrie and hundreds of thousands of other companies are facing, the French government has delayed loan repayments for a year.
“Without government support, we would not have been able to survive this complex stage,” said Eric Pleasant, CEO of the company. “There are still a lot of uncertainties. “
Economies such as the United States and China are recovering rapidly. But in Europe, where immunization programs lag behind other regions and where economic adjustment lags, businesses continue to struggle. The government is expanding its support measures to prevent avalanches of bankruptcies and new financial crises on the continent.
French Finance Minister Bruno Le Mer said: “We do not want to suddenly reduce support and cause tens of thousands of bankruptcies.
In addition to delaying loan repayments, the French government extended the program for six months by the end of the year. So far, $ 166 billion in loans have been guaranteed to approximately 675,000 businesses.
In Italy, Prime Minister Mario Draghi extended the moratorium on loan repayments by six months until December. In Spain, Madrid allows several loans guaranteed by the state.
Some measures will put more pressure on the government, whose debt has skyrocketed since last year, to levels above those seen during the sovereign debt crisis of 2011.
The pandemic crisis is different from the previous recession. In the hope of a significant drop in economic activity and a rapid recovery after the virus epidemic has been brought under control, the European government has invested $ 1.8 trillion in default loans, state guarantees and subsidies in businesses. I kept them. They kept people at work by demanding wages. Countries like Germany have even suspended rules forcing cash-strapped businesses to file for a local equivalent of bankruptcy.
As a result, continental unemployment has remained low. Bankruptcy has also declined. And banks have found little reason to take a big hit in their loan portfolios.
However, its relative stability depends on the loan program.
“If the current measures are removed too soon, companies can push their limits,” said a finance professor 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 subject.
In it, the European Systemic Risk Board states, in the worst-case scenario where the support program simply postponed rather than solved the problem: “
When the tsunami hits, regulators fear the banks may not be ready. Andrea Enria, head of banking supervision at the European Central Bank, has warned that around 40% of euro area banks are not properly informed about loans that are unlikely to be repaid. Despite the obvious risks, many actually reduce the likelihood of default on new loans.
“It’s like a puzzle for us,” Enria said recently.
The greatest concern lies in the southern part of Europe, the most economically vulnerable. There the banks are weak and the country is more dependent on tourism which has been affected.
In Italy, CNA, an association of small businesses, found that more than a third of businesses surveyed said they could not start repaying 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.
“Extending the moratorium is essential for me,” said Christina Vincenzi, owner of a lingerie boutique 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 payment of € 575 with a loan of € 10,000. It’s about $ 12,000.
In Portugal, around a third of all business bank loans are currently on payment holiday, which expires in September. According to the Central Bank of Portugal, the share of the restaurant and accommodation sector has skyrocketed to almost 60%.
Christovaon Lopez has a 170-room hotel in the South Algarve, attracting sun-seekers who take the shuttle bus on inexpensive flights from Northern Europe. Last year, when the company fell 85%, the government’s layoff program covered most of its workers’ wages, and he had access to small grants and paid vacations with more than half of his salary. unpaid debt.
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In June, just at the start of activity, its largest source of customers, the UK, put Portugal back on the list of countries travelers must quarantine upon return. The cancellation continued. Lopes believes that its activity will return to normal only in 2023.
Its debt moratorium ends in September, as the hotel heads into low season.
“Until then, we can’t create enough liquidity,” Lopez said. “You can’t expect a business to go from zero to 100% overnight. “
The Portuguese government has announced its intention to intervene once the moratorium is lifted, guaranteeing part of the loan in exchange for a further suspension of repayments by banks. He has his own risks. Defaulted loans are the responsibility of the government in countries where more than 130% of the public debt of GDP corresponds to the levels reached during the last decade.
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