Extend-and-Pretend, Stimulus Caused Bankruptcies to Plunge in Germany, France, Spain. Now Central Banks Tell Banks to Prepare for Bankruptcy Surge | Wolf Street

German banks need to prepare themselves for a sharp spike in corporate bankruptcies early next year, the Bundesbank warned this week in its 2020 Financial Stability Review. It anticipates around 6,000 insolvencies in the first quarter of 2021. While this would be a little lower than at the peak quarter of the Global Financial Crisis, the Bundesbank cautioned that it “cannot rule out that … a lot more companies will go bankrupt than is currently expected.”

In Germany most companies that were experiencing cash flow problems and unsustainable debt levels back in December, 2019, have effectively been given a new lease of life. And the number of zombie firms — over-leveraged, high-risk companies with a business model that is not self-sustaining — has soared. An estimated 550,000 firms — roughly one-sixth of the total — could already be classified as “zombies”, according to research by the credit agency Creditreform.

A gradual shift in anti-crisis policy appears to be taking place at the ECB. Rather than helping lenders forestall a huge wave of corporate bankruptcies, the ECB is now urging them to put viable businesses first as well as focus on their own financial health. The challenge is in deciding which businesses are viable essentially healthy firms that have temporarily hit hard times and which are true zombies. The Bundesbank has made similar noises in recent weeks, underscoring the importance that banks continue to do their job: to distinguish good from bad risks – and also to grant loans to good borrowers. So, too, have the Fed and the Bank of England.

Extend-and-Pretend, Stimulus Caused Bankruptcies to Plunge in Germany, France, Spain. Now Central Banks Tell Banks to Prepare for Bankruptcy Surge | Wolf Street