It doesn’t take a very sophisticated analysis to understand the deteriorating solvency conditions in businesses and the economy as a whole.
The health crisis has shelved many investment activities for an indefinite period and left many businesses unable to repay their loans, and also unable to take out new loans in order to service debts.
Based on their experience from past crises, central banks rushed to set aside reserves and provisions. The top 14 European and US banks, with a loan portfolio of $3.6 trillion, have total provisions of $70 billion against bad loans, equivalent to 40% of Greece’s GDP.
If banks have secured themselves, how about the real economy? Companies’ solvency has significantly deteriorated, despite the fact that many temporarily survive because of government largesse and low interest rates, at the expense of growth prospects.
The emerging dilemma is whether we will allow businesses without a future to keep operating in order to keep unemployment from exploding in the short term and to keep shoveling depositors’ and investors’ capital toward companies that cannot use it productively. Capital has been directed toward the wrong places to buy jobs for some time. It is no secret that the real beneficiaries are the owners and managers of such companies and that fighting unemployment is a pretext.
The nonviable companies must turn from a burden into an opportunity and this makes helping entrepreneurship imperative. As we said, big US and European banks have made $70 billion in provisions against bad loans. But the investment-grade US firms alone have accumulated $360 billion in reserves during the first half of the year. This is the capital that could fuel the next wave of buyouts of failed companies.
This is the deeper meaning of the “protection” given to insolvent companies. The market seems to have been stuck in immobility. Prospective buyers are reluctant to use their reserves or borrow, even at the current low rates, to make acquisitions.
There could be no better opportunity for Finance Minister Christos Staikouras to submit the bill reforming bankruptcy law. A fast exit of failed companies from the market will accelerate growth.