Personal-Financial.com: Germany is in the deepest recession in history. Nevertheless, thanks to the federal government’s extensive aid packages, there have been few bankruptcies so far. How do you rate the situation?
CHRISTOPHER SEAGON: At the moment there is a noticeably inconspicuous calm. The federal government has succeeded well in mitigating the ad hoc crash of the German economy. The aid programs and changes in bankruptcy law were also important to avoid a bankruptcy tsunami. The question now is whether the decisions made so far can prevent the number of bankruptcies from increasing significantly and whether fundamentally viable business models will not make it into the future.
Are companies already queuing for you?
We weren’t bored before Corona either. Many companies were already in a tense situation before that – for example in the automotive supplier industry or in stationary retail. For industries like these, in which profound transformation processes are taking place, the pandemic is now acting like a fire accelerator. The longer the crisis lasts, the more companies have problems with liquidity. We have noticed that the pressure from lenders on management to seek qualified advice is also growing.
What is it about?
In the first few months of the crisis, companies were often concerned with advice and support with KfW’s aid loans or the special programs of the respective federal states. In the meantime, the focus is increasingly on operational restructuring measures and access to fresh equity. Many companies have noticed that lending – also from the special programs – is handled restrictively.
The federal government wants to extend the exemptions in bankruptcy law again. Over-indebted companies that are only in crisis because of Corona should not have to file for bankruptcy by the end of December. What do you make of it?
The extension is basically correct in the current situation. However, the time gained should now also be used to implement the EU directive for the preventive restructuring framework. This is a procedure by means of which an early restructuring of companies can be initiated without the involvement of an insolvency court. This instrument could enable many companies to restart and prevent a large wave of bankruptcies from occurring once the exemptions from the obligation to file for bankruptcy expire. In addition, consideration should also be given to extending the deadlines for filing for bankruptcy. According to the currently suspended law, managing directors must go to the bankruptcy court within three weeks of becoming aware of the reason for bankruptcy. In practice this is far too short. Because it is often not trivial to determine whether, for example, there is overindebtedness. A significantly longer application period would therefore make sense, around six months would be conceivable.
“Some managing directors understand the exception in insolvency law as a free ticket”
Some of your colleagues and some economists warn against extending the special rules in bankruptcy law. They fear that corporate zombies will arise in a row if no companies can go bankrupt.
It should not be about a permanent extension, but about a bridge until a further restructuring instrument is available with the preventive restructuring framework. Because of course the suspension of the obligation to file for bankruptcy also leads to considerable problems. Some managing directors apparently understand the exception in insolvency law as a free ticket: We know cases in which companies in the corona pandemic ordered new systems as planned before the crisis, although they practically no longer have any business and cannot pay. Then we talk about fraudulent entry. Such cases must be expected more, especially if it continues to pretend that the obligation to file for bankruptcy is unconditional and suspended for everyone. In extreme cases, business partners find themselves in dire straits in the event of payment defaults that are not at all or little affected by the pandemic. One forgets too quickly that functioning insolvency law is also part of calculable and reliable trade.
How can company zombies be prevented?
There were corporate zombies even before the Corona crisis began. There are many of these zombies because we did not do our homework in Germany after the financial crisis and did not pay enough attention to competitiveness and restoration of the socio-market economy base – not least because of the low interest rates. It is all the more important that the current rescue packages and political aid do not lead to entry into a state economy. What we need is a pandemic-related “Marshall Plan” for the German economy. The return to social-market economy criteria should represent the model.
In your opinion, does this also include state holdings in companies?
State investment funds can also be included as an element – such as the federal economic stabilization fund or similar instruments at the state level. But one thing has to be clear: if the state invests equity in companies, it must always define an exit strategy in advance. And he has to make sure that the companies remain competitive. A clearly defined exit strategy is also the decisive factor in corporate trust. And the second point of the – let’s call it the “pandemic exit plan” – must be incentives for successful economic activity under pandemic conditions. Entrepreneurs must consider it much more attractive to go through a tough restructuring in order to earn good money again in a new economic system under corona conditions than to be financed by the state and possibly hope for tax-financed refinancing if the restart does not succeeds or drags on.
“Germany has excellent foundations to emerge stronger from this existential crisis”
If there should be a massive increase in the number of bankruptcies – how well is Germany prepared for such a wave?
Certainly there will be a higher number of bankruptcies in the coming months, after all we are coming from an unnaturally low level. The question is how good are the tools to deal with it. I have already mentioned an important factor in the rapid introduction of the preventive restructuring framework. In any case, we are better positioned in Germany in terms of the framework conditions for a restart than in the USA, for example. Just think of our short-time work allowance, against whose proven achievements in overcoming economic crises many overburdened officials across the Atlantic are still fighting. Germany also has a well-functioning bankruptcy judiciary and qualified restructuring experts and insolvency administrators. That was different 30 years ago. That is why we have already coped well with the consequences of the financial market crisis. From the point of view of restructuring, Germany and Europe have excellent foundations to emerge stronger from this threatening existential crisis.
In the current issue, we deal in detail in the cover story with the impending wave of insolvencies in the German economy and the dilemma of the rescue policy. interested in Personal-Financial.com? Here is the Subscription shopwhere you can order the print version. Our digital edition is available at iTunes and GooglePlay