Sharp decline in insolvencies in 2020 but a high risk outlook for 2021

[December 9, 2020] BPCE’s economists have analyzed the weaknesses and resilience of business organizations impacted by the Covid crisis. They conclude that the massive injection of State support has enabled companies to limit the deterioration in their financial positions or to postpone its effects.

This unprecedented crisis hit French companies at a time when they were suffering from greater ex-ante fragility than their European counterparts in terms of indebtedness and profitability. Although the crisis is chiefly sector specific – with services to individuals being particularly affected along with accommodation & catering, construction, transport equipment, and the retail trade – it has had a more severe impact on companies pursuing growth strategies and very small businesses, which are frequently more vulnerable to economic shocks than larger entities.

However, the massive support provided by the State in the form of emergency measures (partial unemployment, solidarity fund, State-guaranteed loans, postponement of social security contributions, etc.) made it possible to limit the impact of lost business activity on corporate financial situations. The extensive use of State-guaranteed loans have protected businesses against liquidity risks; the €173 billion in additional gross debt built up since March has resulted in the strengthening of cash flow positions by additional investment flows of €174 billion.

The vigorous support measures taken by the public authorities also led to a significant decline in corporate insolvencies in 2020: by a factor of 45% according to estimates drawn up by Groupe BPCE’s economists. Indeed, the number of business failures has reached its lowest point since 1991. It has been estimated that a total of 28,000 insolvencies have been avoided, all things being equal (i.e. compared to a situation where the economic downturn had not been countered by the measures adopted by the French government). Is this a permanent achievement or merely the postponement to 2021 or 2022 of 28,000 insolvency procedures? The situation is all the more critical as business closures without bankruptcy proceedings are also liable to increase: faced with an almost 30% decline in the number of business transfers, the more elderly owners of small- to medium-sized enterprises (6% of business owners are over the age of 70) could abandon their search for a buyer and simply wind up their activity.

  • The length of time between the moment government support measures come to an end and the effective recovery of the general economy,
  •  The risk of constricted cash flow during the economic recovery owing to the combined pressure of increased working capital requirements and the reimbursement of debts and the payment of deferred social security contributions,
  •  The risk that the impact of the recovery plan will come too late to boost economic recovery, to counter a prevailing “wait-and-see” attitude, and steer the expectations of the business community towards new growth.