Corporate defaults surge in some EU countries

Corporate defaults increased in a number of European countries in the first half of 2024 compared to the same period last year, as inflation, high interest rates and subdued economic growth continue to put pressure on companies, ratings agency Scope Ratings said in a report published on Wednesday.

Austria saw by far the largest year-on-year increases in corporate defaults in Europe, with a 90 per cent increase.

It was followed by the Netherlands and Sweden, which saw defaults rise by 37 per cent and 34 per cent, respectively. German defaults increased by 24 per cent, while French defaults rose by 18 per cent, according to the report.

Other countries, however, presented “pockets of stability”, said the report. In the UK, there was a 2 per cent year-on-year decrease in insolvencies, while Norway’s corporate default level remained almost flat. Meanwhile in Denmark, defaults reduced by 19 per cent. 

“These figures underscore the uneven nature of the economic recovery in Europe, where some markets are managing to stabilise, while others continue to grapple with escalating financial pressures,” said Scope Ratings in the report.

Overall, insolvency rates in the first half of 2024 “surpassed pre-Covid levels in nearly all major markets, signalling widespread financial strain,” it said.

Scope Ratings drew on data from a variety of sources, including national statistics agencies and publicly available government figures. 

The report comes as Eurostat’s default statistics published last week found that the number of business bankruptcy declarations in the second quarter of 2024 in the EU increased by 3.1 per cent compared with the previous three months.

“Credit risks remain concentrated in sectors which show very high fragmentation and intense competition,” Sebastian Zank, head of corporates credit production at Scope Ratings, told The Banker. 

“While these trends are good for consumers, they create high potential for defaults as even smaller shocks or more minor industry developments can create imbalances in supply and demand that can be too challenging for some companies to cope with,” Zank said.

The elevated default risk is particularly affecting non-investment grade corporates, said the report.

Around 40 per cent of non-investment grade corporates are experiencing negative rating actions, with 20 per cent holding a negative outlook. Investment grade credits, however, fared better, with 10 per cent of ratings maintaining a negative outlook.

Corporate defaults are set to continue rising over the next few months before stabilising towards the end of the year, according to the credit rating agency.

Towards the end of 2024, possible rate cuts and better growth prospects should stabilise corporate defaults across Europe, the report said.

There are already signs of easing pressure on the tightening of lending standards, according to the European Central Bank’s latest bank lending survey, published in July. 

“These supporting factors suggest that while the risk of corporate defaults remains, the situation could stabilise, with the most severe pressures beginning to abate in the latter half of 2024,” said the report.