Sustained demand contraction causes bankruptcies

Optimistic scenarios of Covid-19 impacting the economies all across the globe were expecting a V-shape recovery, and subsequently rebound in one or two quarters. Following this logic you would inject liquidity into the market similar to what has been done for the last decade of low interest rates and give government guarantees.

Unfortunately this scenario is unrealistic. If Covid-19 is as dangerous as we think it is, the only realistic scenario is to have a vaccine in place. As long as this is not the case, a second and third wave of the virus comes into play. Economic subjects will consider this and build this information in their expectations.

This results in a structural change in the economies, which will lead to people saving more money for bridging potential income reductions due to unemployment. This in turn has an effect on demand in the mid- and long-term meanwhile. The lower demand will pay it’s dues. Market players, which have relatively high fixed costs compared to competition and are overleveraged will be cleaned up from the market. Market players that were able to restructure and are cost leaders in their industries will have the best chances to survive the upcoming recession.

We must take into consideration now that a wave of bankruptcies will arise in the second half of 2020, showing its peak in 2021 and lasting until 2022. A logic consequence is to evaluate your customers, suppliers, stocks, the value of a company you want to acquire, and last but not least your own company’s default risks.

One very effective solution is to use Emerald Rating product platforms.

For further insides we recommend the article by Paul Hodges published in ICIS.com  on July 19th 2020 with the title “Bankruptcies now the key risk as hopes for V-shaped recovery disappear”.

 

Author: Danny Kaltenborn, Date: August 8, 2020

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