The coming wave of business bankruptcies

{"text":[[{"start":11.64,"text":"Joseph Schumpeter shocked many with his forthright views about the power of free markets. "},{"start":16.469,"text":"The early 20th century Austrian economist once told his students at Harvard University: “Gentlemen, a depression is for capitalism like a good, cold douche”. "},{"start":25.087,"text":"He was, of course, referring to the forces of creative destruction that drain away weak enterprises during a downturn — and the term for shower. "},{"start":32.917,"text":"Right now, while a depression is not on the cards, higher interest rates are straining economic activity and a wave of corporate insolvencies are expected. "},{"start":40.759,"text":"After a decade of rock-bottom rates a Schumpeterian cold shower may not be a bad thing. "}],[{"start":46.47,"text":"Corporate bankruptcies in America are on course to hit their highest level since 2010. "},{"start":51.524,"text":"Insolvencies have already reached a post-financial crisis high in England and Wales, and have surged in the eurozone too. "},{"start":57.792,"text":"Allianz forecasts a rise in insolvencies in advanced economies in the next few years, as more businesses refinance on to higher rates. "},{"start":65.27199999999999,"text":"Indeed, in the coming five years, over $3tn of corporate debt is due for repayment in the US. "}],[{"start":71.95,"text":"This should come as no surprise. "},{"start":74.19200000000001,"text":"Interest rates have risen at their fastest in four decades, the labour market is cooling and demand is set to slow. "},{"start":80.23400000000001,"text":"Companies are eating into their cash reserves, and could be in line for a significant step-up to their borrowing costs. "},{"start":86.052,"text":"Energy bills have soared, post-pandemic government support has waned, and repayments have also come due. "}],[{"start":92.83,"text":"The hit to businesses, and workers, is the cold reality of higher rates. "},{"start":97.434,"text":"In the long run, however, it could be positive for the economy. "},{"start":101.314,"text":"Part of the rise in insolvencies is a catch-up effect. "},{"start":104.407,"text":"Many companies that fold are likely to have been propped up by Covid-19 policy measures, and would have collapsed in any case. "},{"start":110.787,"text":"Zombie companies — which include enterprises that are in financial distress and persistently unprofitable — will be pinched too. "},{"start":117.317,"text":"These businesses proliferated in the era of low rates that followed the global financial crisis: their share of listed companies globally rose 4 percentage points to 10 per cent in 2021, according to an IMF working paper. "}],[{"start":null,"text":"

"}],[{"start":129.87,"text":"Zombies sap economic productivity by lowering investment and employment for more efficient businesses. "},{"start":135.537,"text":"To the extent that the coming quarters of high rates and low growth act as a Darwinian winnowing, sifting out weak companies, bankruptcies should not be feared. "},{"start":143.542,"text":"But that does not mean the process is without risk. "}],[{"start":146.73000000000002,"text":"First, a zombie apocalypse, where the collapse of weak companies spread to larger and more efficient ones in the supply chain, would be problematic. "},{"start":154.859,"text":"Second, private capital markets have stepped in to support companies, where leverage exposures are harder to gauge. "},{"start":160.98900000000003,"text":"Third, many inefficient companies could survive. "},{"start":164.09400000000002,"text":"Some refinanced before rates shot up and locked in cheaper debt for longer. "},{"start":168.11200000000002,"text":"Key elections next year could also mean government appetite for support remains. "}],[{"start":173.28000000000003,"text":"So far, the strains are concentrated in the most highly leveraged enterprises in the retail, healthcare, real estate, and construction industries. "},{"start":181.67200000000003,"text":"In the UK, small businesses — which have fewer systemic implications — are reporting a higher risk of insolvency than larger companies. "},{"start":189.31400000000002,"text":"Regulators still, however, need to boost their monitoring of private markets for any knock-on risks. "},{"start":194.96900000000002,"text":"And above all, restructuring and insolvency services need to be prepared to ensure companies can fail well, and fast. "},{"start":201.74900000000002,"text":"The longer it takes, the greater the strain on businesses and the economy. "},{"start":205.66700000000003,"text":"Retraining and job search support will also help unemployed workers find new roles. "}],[{"start":211.26000000000002,"text":"As for the zombies that survive, if rates end up settling higher in the long run — particularly compared to the past decade — then capital will at least begin to flow more towards the best businesses. "},{"start":221.889,"text":"With start-up activity still buoyant, that is something to embrace, not fear. "}],[{"start":226.37,"text":""}]],"url":"https://creatives.ftacademy.cn/album/129309-1699499606.mp3"}