Analysis of Corporate Insolvencies Resulting From the Corona Pandemic and Impact Assessment of Fiscal Measures

Tasks

The aim of this expert report is to identify and quantify key factors influencing insolvencies and to draw conclusions about the magnitude of the insolvency risk and thus the expected insolvencies.

Methods

Conditional Forecasts based on vectorautoregressive (VAR) models

Data and Other Sources

Federal Statistical Office, Joint Economic Forecast Spring 2021

Results

Insolvencies during the corona crisis and the accompanying sharp economic downturn in 2020 was much lower than one might have expected on the basis of historical correlations. Above all, the number of corporate insolvencies fell further from a good 18,700 in 2019 to just over 15,800 in 2020, although model forecasts would have suggested a sharp rise to over 20,000. The expected claims from filed insolvency proceedings did increase from 34 billion euros in 2019 to 48 billion euros in 2020, which was at least in line with the model forecasts. However, the increase was significantly weaker than expected and also inflated by the insolvency of Wirecard AG, which is unlikely to have been a direct consequence of the corona crisis and the associated economic slump. Depending on the model specification, the expected claims from filed insolvency proceedings should have risen to 60 to 100 billion euros.

The discrepancy between the development of the number of corporate insolvencies filed and the level of expected claims from insolvency proceedings filed is due to the accumulation of only a few, but large insolvencies in 2020. There are two possible explanations for the low insolvency dynamics compared to the model forecasts. On the one hand, the impact of state aid measures on insolvency dynamics is unlikely to be reflected in the forecasts on the basis of historical contexts, as the scope and design of these measures could not be observed in the past. On the other hand, the suspension of the obligation to file for insolvency, which has been in effect since 1 March 2020, is likely to have prevented an increase in insolvency dynamics. 

For the evaluation of the policy measures, a procedure was used that compares the insolvency risk of two scenarios. In each scenario, the insolvency risk is estimated as a conditional forecast of a VAR model. For almost all model specifications, it is shown that the state aid measures have reduced the insolvency risk. On average across all model specifications, the reduction in insolvency risk was just under 25 percent. 

The greatest influence on the insolvency risk came from the state subsidies for companies, which were paid out in 2020 as part of the Corona aid amounting to over 40 billion euros and which directly reduced the collapse in profits of the companies. The comparison of a forecast without the payment of corporate aid with a forecast based on the actual collapse in profits shows that for a given path of overall economic activity the payment of corporate aid is likely to have reduced the risk of insolvency by about 40 percent in 2020.

Companies also experienced a significant relief in terms of employee compensation.  For the year 2020, the decline was 23 billion euros higher than would have been expected from a forecast based on historical correlations with the same slump in gross domestic product. The model simulations suggest that this in itself reduced the insolvency risk by 18 percent. Compared to a forecast based on historical correlations, both a stronger increase in the number of persons in short-time work and a stronger decline in the number of exclusively low-paid employees are likely to have contributed to this. 

Finally, according to the present model simulations, the tax liquidity support measures adopted in the Corona crisis have also reduced the insolvency risk in 2020. Compared to the model variant with pre-tax profits, the reduction in insolvency risk was increased from 24 to 36 percent compared to the base scenario. This effect resulted from the changes in corporate income taxation, which relieved the companies in particular during the crisis in the first half of 2020.

Publication