Global company bankruptcies rise despite $11trn liquidity injection by governments

Charles Abuede, with FT report

Global company bankruptcies are rising despite the injection of $11 trillion liquidity and other government help in 2020, a report by the Financial Times has asserted.

It said stocks and securities are at record-breaking highs and sovereign, with corporate yields at all-time lows, but that companies around the world are becoming bankrupt at the quickest pace since the Great Depression.

“Since the 2008 crisis all policy actions have been aimed at keeping sovereign bond yields low, bailing out bloated government spending and deficits and the massive liquidity injections have benefitted the large quoted companies that have used the money to shield their valuations through buy-backs and cheap debt,” the paper reported. 

According to the British financial newspaper, trillions of liquidity are giving financial specialists or investors and governments a misguided sensation that all is well and good since yields are low and valuations are high, yet it is a hallucination driven by central bank purchases that can’t camouflage how quickly organisations are going into long term solvency issues. It added that this was significant in light of the fact that rising cases of bankruptcy points to less employment, investment, and low growth on a later date.

Over 45 large US firms have filed for bankruptcy as at August 2020

The large US corporate bankruptcy filings are presently running at a record pace and are set to outperform levels reached during the 2009 financial crisis, as a record 45 firms each with assets of more than $1 billion have petitioned for Chapter 11 insolvency, as of August 17, 2020, reports the FT.

Further revelation from the report shows that in Germany, around 500,000 organizations are considered marked by an inconsequential “indebtedness law” that essentially extends the agony of businesses that are in fact bankrupt, adding that in Spain, the Bank of Spain alarmed that 25 per cent of all companies are near shutting down because of bankruptcy.  But according to Moody’s assessments, over 10 per cent of firms in leading economies are in extreme financial crisis with many in technical bankruptcy.

“However, cheap money has also triggered mal investment, poor capital allocation and higher-than-normal levels of debt. Small businesses did not see the alleged benefits of the massive liquidity and deficit programmes, while large companies became too comfortable with elevated levels of a dent, poor return on capital employed and solvency ratios that were simply too low in a growing economy,” the report shows.

On the other hand, the report further revealed that cheap cash and massive bailouts have planted the seeds of a dissolvability crisis that was set off by the reckless choice of certain governments closing down whole economies. On the off chance that you have an economy that is profoundly utilized and with feeble profitability and dissolvability proportions, closing down the economy for two months is the last nail in the final resting place.

Bailing out zombie firms will worsen matters as new lockdowns could be deadly

Although, the report states, rescuing what it called “zombie firms” will just worsen the situation, and that further lockdowns could be deadly.

The report noted that solution could be supply-side measures that activate the systems of refinancing, re-structuring, and productivity improvement; while more demand-side policies and more liquidity injections will just compound the situation and drive the economy to a stagflation crisis where the next issue might be to go into bankruptcy and banks’ assets valuations fall and non-performing loans (NPLs) swell despite Central Bank actions.

It also noted that governments will like to go down the Japan course: More debts, more bailouts, and huge government spending. But the report stated that in any case, it will just prompt stagnation and propagating irregular imbalances that can’t be concealed when the slip-ups of Japan are actualized by the eurozone, China and the United States. There is no conceivable manner by which huge spending and liquidity gorges will deliver anything besides higher debts, weaker growth, and lower real wages.