EU bankruptcy filings jump to 8-year high as pandemic aid ends

The number of EU businesses filing for bankruptcy rose to the highest level for at least eight years in the fourth quarter, indicating that more of the struggling “zombie” companies kept afloat by government aid during the pandemic are starting to collapse.

Eurostat, the EU statistics office, said on Friday that bankruptcy declarations by companies in the region rose almost 27 per cent compared with the previous quarter of 2022, reaching the highest level for any three-month period since the agency started collecting the data in 2015.

Economists said the shift, which follows two years of falling insolvencies across Europe, reflected worsening conditions for many European businesses because of slowing economic growth, soaring energy prices, rising wages and higher financing costs.

“There are a lot of companies that were given a free pass during all of 2020 and 2021 when they didn’t even have to pay some of their creditors, such as social charges in France,” said Ludovic Subran, chief economist at German insurer Allianz, which is forecasting an increase of almost 20 per cent in western European bankruptcy filings this year.

“These fallen angels, or companies that can barely manage, are now facing less support, with increased financing and wage costs and it is becoming completely untenable,” he said.

There was a particularly sharp increase in Spanish bankruptcy filings, which more than doubled in the second half of last year after changes to the country’s insolvency law made it easier for companies to restructure their debt, prompting a surge in such court filings.

After governments across Europe introduced support measures for companies hit by the economic fallout of the pandemic in 2020, the number of bankruptcies fell sharply. This prompted criticism that state aid and low interest rates were keeping “zombie” companies afloat that would otherwise fold because their profits did not cover their interest costs.

As state support is being withdrawn, more companies are collapsing. Overall EU bankruptcy filings increased 35 per cent between the first half and second half of last year. But while this produced an annual increase of 16.5 per cent last year, the total remained almost 6 per cent below pre-pandemic levels in 2019.

The biggest increase in EU insolvencies in the fourth quarter was in the transport and storage and the accommodation and food services sectors, where they rose 72 per cent and 39 per cent respectively from the previous quarter, Eurostat said.

French bankruptcy filings rose almost 16 per cent in the second half of last year after the government ended many pandemic relief measures. However, in some large economies, such as Germany and Italy, the number of company bankruptcies declined.

James Watson, chief economist at the EU employers’ federation BusinessEurope, said: “There is clearly a factor of governments withdrawing support introduced during the pandemic and that is having an impact.” 

But he added: “There is also something else going on, as it is becoming an increasingly difficult trading environment for many companies due to high inflation, weak growth and rising interest rates.” 

Spanish authorities hope the country’s new insolvency law, which was passed in September to implement an EU directive, will facilitate the sale of business units and put an end to lengthy restructuring processes that become bogged down in the courts by giving creditors more power.

One of the first large Spanish companies to test the new law is steel producer Celsa, which has a financial restructuring plan going through a court procedure to reduce its €2.8bn debt.