Post by account_disabled on Feb 28, 2024 0:05:42 GMT -5
Government credit guarantees and liquidity support certainly hit the mark, helping to keep vulnerable businesses afloat. But they hide considerable economic scars. Some sectors and companies have not yet fully recovered, and others may never recover, especially those most affected by pandemic-related containment measures and the resulting changes in consumer behavior. At the same time, delays in insolvency proceedings and the (until now) shallow recession have helped keep corporate defaults low. But these suppressed bankruptcies mask considerable losses, which could emerge quickly as the effects of strong policy support fade, given the build-up of corporate leverage and still weak fundamentals. In fact, many small businesses are barely afloat and will need to be liquidated or restructured. Unless addressed soon, worsening corporate profitability could quickly turn into losses, and these liabilities would become real losses for the sovereign.
In the worst case, the complex system of interrelationships between real activity, banks and sovereign states means that an incipient corporate necrosis would spread rapidly, triggering a fundamental revaluation Job Function Email Database of risk in a new fatal cycle. A trickle of defaults in a few critical, well-connected sectors could quickly grow into a torrent, and the sudden realization of losses would shake capital markets, precipitating a systemic crisis that would reverberate through corporate, financial and sovereign feedback loops. , where price declines would trigger even more weakness in related areas. If it is anything like previous crises, this extreme scenario could result in a cumulative default rate of 10 percent over the next two years. This would imply a sharp increase in insolvencies, based on a current annual default probability of less than 1 percent.
The resulting losses in the corporate sector would wipe out about three years of profits for banks, which would respond by cutting their riskiest lending to preserve capital, typically to the small and medium-sized businesses that need it most. For eurozone governments, direct losses and lost corporate tax revenue could total up to 5 percent of GDP on average, deeply shrinking what little policy space remains. In this situation, the eurozone would find itself in a prolonged recession, but this time with more debt and minimal political space for another fight. In this context, financial sector policies in the eurozone must be more forward-looking with regard to corporate sector risks, especially in countries where lower insolvencies over longer periods of time and lower asset recovery rates amplify economic scars, They undermine the financial system and erode valuable political space.
In the worst case, the complex system of interrelationships between real activity, banks and sovereign states means that an incipient corporate necrosis would spread rapidly, triggering a fundamental revaluation Job Function Email Database of risk in a new fatal cycle. A trickle of defaults in a few critical, well-connected sectors could quickly grow into a torrent, and the sudden realization of losses would shake capital markets, precipitating a systemic crisis that would reverberate through corporate, financial and sovereign feedback loops. , where price declines would trigger even more weakness in related areas. If it is anything like previous crises, this extreme scenario could result in a cumulative default rate of 10 percent over the next two years. This would imply a sharp increase in insolvencies, based on a current annual default probability of less than 1 percent.
The resulting losses in the corporate sector would wipe out about three years of profits for banks, which would respond by cutting their riskiest lending to preserve capital, typically to the small and medium-sized businesses that need it most. For eurozone governments, direct losses and lost corporate tax revenue could total up to 5 percent of GDP on average, deeply shrinking what little policy space remains. In this situation, the eurozone would find itself in a prolonged recession, but this time with more debt and minimal political space for another fight. In this context, financial sector policies in the eurozone must be more forward-looking with regard to corporate sector risks, especially in countries where lower insolvencies over longer periods of time and lower asset recovery rates amplify economic scars, They undermine the financial system and erode valuable political space.