Lilas Demmou, Sara Calligaris, Guido Franco, Dennis Dlugosch, Müge Adalet McGowan, Sahra Sakha, 22 January 2021

Many countries have now entered a second wave of the Covid crisis, forcing firms to deplete even further their cash and equity buffers and to raise new financing. This column investigates the likelihood of firms’ insolvency and the potential implications of debt overhang following the outbreak. It foresees that around 7-9% of otherwise viable companies would become distressed, accompanied by an increase in firms’ leverage ratio of about 6.7 to 8 percentage points. In turn, the latter would decrease investments of the median firm by approximately 2 percentage points. The column also outlines some policy options to flatten the curve of crisis-related insolvencies through recapitalisation and to establish efficient insolvency procedures.

Bo Li, Jacopo Ponticelli, 06 August 2020

The lack of an efficient and independent judicial system can impede economic development by negatively affecting firms’ ability to invest, innovate, and reallocate capital towards more productive projects. This is indeed a concern for China. This column exploits the introduction of specialised bankruptcy courts in different Chinese cities between 2007 and 2017 to examine its effects on the local economy. Specialisation leads to faster resolution of bankruptcy cases, especially for state-owned firms. It also increased local firms’ average product of capital and decreased the share of labour employed in zombie-intensive industries compared to cities where insolvency is still resolved exclusively by civil courts.

Bo Becker, 27 June 2019

A new EU directive proposes important reforms to member countries’ corporate insolvency processes. This column argues that the directive is a step in the right direction but that it has crucial flaws in the way it envisions restructuring and priority of creditors. It also proposes a system – comparable to the US approach – in which restructuring and liquidation are alternative options triggered by insolvency, and that respects the absolute priority of creditors. 

Dan Andrews, Filippos Petroulakis, 04 April 2019

Europe’s productivity problem is partly due to the rise of zombie firms that crowd out growth opportunities for others. This column explores the tendency for weak banks to evergreen loans to zombie firms to avoid realising losses on their balance sheet. Measures to strengthen bank balance sheets will be enhanced by insolvency regimes that encourage corporate restructuring.

Stephen Cecchetti, Kim Schoenholtz, 03 November 2017

Black Monday has been referred to as the first contemporary global financial crisis. This column reviews key aspects of the 1987 crash and discusses the subsequent steps taken to improve the resilience of the financial system. It also highlights a key lingering vulnerability – the lack of a mechanism for managing the insolvency of critical payment, clearing, and settlement institutions.

Paul McGhee, Julio Suarez, Gary Simmons, 29 April 2016

The European Commission aims to propose new legislative on business insolvency by the end of 2016. This column presents new research that seeks to quantify the impact of improving EU-wide insolvency regimes. It suggests that improving insolvency regimes could reduce corporate bond spreads by 18 to 37 basis points, expand EU GDP by 0.3% to 0.55% over the long term, and increase employment by 0.6 to 1.2 million new jobs. A number of proposals for targeted harmonisation are also outlined. 

Events

CEPR Policy Research