Europe’s Bankruptcies Are Plummeting. That Could Be a Downside.

PARIS – Romain Rozier’s Café should be bankrupt by now.

Since the coronavirus outbreak last spring, sales at what was once a lively lunch break in north Paris have fallen 80 percent. The only customers for a day were a couple of UberEats couriers and a handful of people, far apart at the counter, ordering take-out.

“We are standing at the door of death,” said Rozier, reckoning the 300 euros he had earned in the midday shift to be well below the 1,200 euros he had earlier collected. “The only reason we didn’t go down.” is for financial aid. “

France and other European countries are spending huge sums of money to keep companies alive during the worst recession since World War II. But some fear that they have gone too far; Bankruptcies are falling to a level that has not been reached in decades.

While the aid has prevented unemployment spikes, there is a risk that parts of the economy will become a kind of twilight zone where businesses are flooded with debt they can’t pay off but receive just enough state aid to stay alive – so-called zombie companies. These companies, unable to invest or innovate, could contribute to what the World Bank recently described as a potential “lost decade” of stagnant economic growth caused by the pandemic.

“We have to get away from all these subsidies at some point – otherwise we will have a zombie economy,” said Carl Bildt, co-chair of the European Council for Foreign Relations and former Swedish prime minister.

In France and the United Kingdom, bankruptcies fell by 40 percent last year and by an average of 25 percent in the European Union. According to a study by the National Bureau of Economic Research, a private American organization, the failure of European companies would have nearly doubled in the past year if the government hadn’t intervened, including billions of government-funded loans and subsidized payrolls.

At the Paris Commercial Court, Judge Patrick Coupeaud, who has been handling bankruptcy cases for nearly a decade, sees the difference. “I have about a third fewer people who come to see me because many difficult businesses are supported by the state,” he said, pointing to the court’s almost empty marble halls.

In contrast, Chapter 11 bankruptcy filings in the US rose to their highest level since the 2010 financial crisis in the third quarter, a trend that is expected to continue in 2021, according to an index compiled by US law firm Polsinelli.

President Biden has proposed a new $ 1.9 trillion bailout to tackle the economic downturn and Covid-19 crisis. Last week the government reported that 900,000 Americans had submitted new jobless claims.

These statistics shape a debate over whether the European strategy to protect businesses and workers “at any cost” will cement a recovery or make the economy less competitive and more dependent on government aid when the pandemic recedes.

“Parts of the misery have only been delayed,” said Bert Colijn, chief economist for the euro zone at the Dutch bank ING. He added that there would be “a process of catching up in bankruptcies” and an increase in unemployment if support measures were withdrawn.

Analysts say government programs are already weighing on the economy with thousands of inefficient companies with low productivity, high debt, and high probability of default once low interest rates normalize.

According to Rexecode, a French business think tank, an estimated 10 percent of businesses in France have been saved from bankruptcy thanks to government funds.

Letting unprofitable companies go under, though painful, said Jeffrey Franks, head of the International Monetary Fund’s mission for France, will be vital to the thriving of competitive sectors.

Updated

Jan. 24, 2021, 8:21 p.m. ET

A wave of bankruptcies “isn’t necessarily that bad,” he said. “It’s part of the normal creative destruction process of revitalizing economies.”

The Organization for Economic Co-operation and Development urges governments to optimize their support measures to ensure a revitalization of growth. “Otherwise, recovery could be hampered by trapping resources in unproductive ‘zombie companies’ and jobs,” the organization said in a recent assessment.

Most European governments planned to end support last fall as the coronavirus would be under control. But a second wave of cases has filled hospitals, followed by faster-spreading variants of the virus, all of which led to an expansion of aid. The European Union approved a € 2 trillion recovery package late last year.

In France, investment is seen as a means of achieving social stability by preventing mass unemployment. Finance Minister Bruno Le Maire has pledged to maintain support “while the crisis lasts,” a strategy he described as the “spirituality” of the economy.

Almost no companies are left out of big business if they lobby hard enough – not even French snail farmers who recently won a battle for limited financial aid while restaurants, who are their main buyers, remain closed.

As governments’ Covid debt skyrocketed, European tax rules have been suspended. France is among several countries that say they have no plans to repay the huge bill until the economy recovers.

Currently, the financial support is preventing the collapse of many once healthy businesses whose main calamity was the pandemic. At the Paris Commercial Court, Judge Coupeaud said the measures helped avoid a domino effect by encouraging companies to use government-secured loans and other aids to pay off suppliers and debts.

France’s bankruptcy system differs from that in other countries in that it encourages troubled companies to come forward before defaulting and offers help in negotiating with creditors.

“Failure is not a word the French like to use,” said Dominique-Paul Vallée, the court judge responsible for helping business owners avoid bankruptcy. “We’d rather say we’re saving companies.” He added that there has been a surge in companies asking for help.

Those who filed for bankruptcy protection in 2020 tended to be large companies with a large workforce, such as the retailer Camaïeu with 3,900 employees and Alinea, a furniture maker with 2,000 employees. This was a departure from the small and medium business cases that the court normally hears.

Even so, the safety net only goes so far. Countless companies face rising debt, falling profitability, and limited investment capacity the longer the pandemic lasts.

Mr Rozier is a case in point. He opened his Make Your Lunch organic café in 2016 in a busy business and cultural district. The concept was so successful that he opened a second café near the busy Paris Opera.

Business crashed after the pandemic, when offices that housed thousands of workers were vacant and largely unoccupied for most of the year.

The government helped pay most of the salaries of his employees, and Mr Rozier received a low-interest government loan of € 30,000, the payments of which were on hold until May and which the government extended for a year last week. After a new national ban in October, restaurants like him received an additional € 10,000 per month in direct aid.

But that money hasn’t made up for months of lost sales. “My treasury is empty,” said Mr Rozier, who sold his café near the opera in the summer and spent a large part of the state loan on repaying suppliers. With 80 percent fewer customers, he is three months behind his monthly rent of 4,000 euros and has difficulties paying social security taxes, electricity and other expenses.

The government allows restaurants to offer take-away only. Mr Rozier has become an unofficial spokesperson for restaurant owners demanding that the government reintroduce patrons to them with social distancing in order to survive.

After the New Year vacation break, he said his morale collapsed when he reopened the business.

“I waited. And I waited. And three people came in the door,” said Mr. Rozier.

“At this point there is a real risk that I will have to close within a few months,” he continued. “I’d rather sell the business than go to a bankruptcy court.”

Two of his friends, also restaurant owners, have already filed for bankruptcy.

“There are many more who will follow in their footsteps,” said Rozier. “We know that for sure.”

Antonella Francini contributed to the reporting.

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