Economy & Politics

Banks fear wave of bankruptcies

Despite the arsenal deployed to fight the crisis linked to the covid-19 pandemic, finance professionals are calling on the State to step up efforts to save businesses in difficulty.

Despite the arsenal deployed to fight the crisis linked to the covid-19 pandemic, finance professionals are calling on the State to step up efforts to save businesses in difficulty.

(DH with Marco Meng) – While the country has taken out a loan of 2.5 billion euros to cope with the covid-19 crisis and ensure the loans guaranteed by the State in favor of companies, optimism does not win the ranks of entrepreneurs. The banking sector, the main interlocutor of companies, demands that the support measures be maintained and even reinforced to avoid the multiplication of liquidations.

“For the moment, companies remain cautious because no one really knows if we are already at the end of the tunnel,” explains Jeffrey Dentzer, Corporate & Institutional Banking manager at Banque Internationale à Luxembourg (BIL). According to him, the big unknowns remain because economic activity fell 25% at the peak of the crisis and the risks of “a V or W curve, which would mean a slowdown after a short recovery” exist.

Since mid-March, many small entrepreneurs have been patiently waiting for the day when they will be allowed to reopen their businesses. The government has announced aid measures, but is that really enough?

For companies that have just resumed their activities, the moratorium granted by the banks regarding the reimbursement of loans granted before March 18 eases tensions. In fact, by the end of April, more than 8,000 six-month moratoria, representing a cumulative value of more than 2.6 billion euros – entirely borne by the banks – had been granted to companies. But if the acceptance rate corresponded to almost 98% of the requests, this measure does not guarantee the economic survival of the borrowers.

Herbert Eberhard, managing director of Creditreform Luxembourg, does not intend to make plans on the comet, even if he believes that there is little doubt that a wave of bankruptcies will soon be observed. A new phase which would follow the increase of almost 6% in the number of companies going into liquidation. Indeed, in 2019, 1,263 companies had shut down on a quota of more than 36,000 companies, according to the Chamber of Commerce.

On average, since 2010, around a thousand companies per year have gone bankrupt in the Grand Duchy. Or as many defaults for banks. In order to ease the pressure on the sector, Europe has mobilized and certain requirements have been reduced, such as the postponement by one year of the increase in equity of financial institutions desired by Brussels.

However, with the state guarantee of up to 85% of new loans granted to companies, do banks benefit from this crisis situation? “There are no winners in this crisis,” says Philippe Depoorter, member of the Executive Committee of Banque de Luxembourg and responsible for business & entrepreneurs activity. And for good reason. “The crisis is also partly affecting the banks themselves,” he said, noting the drop in credit demand.

“Many projects are on hold due to general economic uncertainty. Everyone is in the fog ”, he still measures while Brussels forecasts a drop in economic production of 7.4% this year in the EU while in Luxembourg, according to Statec, it would not be than 5.4%. This is in no way a guarantee of the continued activity and survival of societies shaken since the start of the health crisis.

“The aid granted, for a maximum duration of six years, will still have to be reimbursed by companies,” insists Philippe Depoorter. “And if you don’t have strong enough kidneys, it will be impossible.” The situation is also very critical for small businesses, particularly in the areas of gastronomy, tourism and retail, as indicated by the figures published by Statec in April. In this regard, the boost for the sector from 700 to 800 million euros, announced this Wednesday by Prime Minister Xavier Bettel (DP), seems like good news.

“But the loans are not there to finance the fixed costs,” says the head of the Banque de Luxembourg, who requests direct aid from the state, “because now many companies do not have the capacity to contract and to repay large loans. ”

For Yves Biewer, member of the Raiffeisen Bank Executive Board, the major uncertainty that banks should take into account is the question of whether a second wave of infections will surge and how it would be managed. “Will there be a new containment and what will it look like?” Nicolas Henckes, director of the Luxembourg Confederation of Commerce (CLC), also confirms that companies which have had no income since March do not rush for new loans.

“This factor could be mitigated if the government increased its guarantee to 100%,” he said. “We are not afraid that companies will be over-indebted, we are afraid that they will go bankrupt.” “With a loan, the only question is whether you want to die today or a little later.” According to him, other measures are necessary: ​​discounts in terms of rent, taxes or social charges. And even interest rates applied by banks “which sometimes reach 6%”, instead of the 2 or 3% announced by Pierre Gramegna (DP), the Minister of Finance.

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