Businesses still have to take the biggest hit, and we’ll all feel it. So says Johann Jeromes, director of risk at Benelux at Allianz Trade, the world’s largest credit insurance company.
While many people yearn for a glimmer of economic hope and hope that the pain will be over, the harsh truth is that the biggest shock is yet to come. ‘fasten your belts’ Johann Jeromes warns. There are many unseen negative factors combined. They reinforce each other and this leads to a negative domino effect.
The energy crisis has caused high inflation leading to high wage increases, energy-intensive companies in Europe getting into trouble, a strong dollar that makes goods more expensive which leads to inflation, central banks making money more expensive, and companies paying their bills. Pay later and later, which puts other businesses in a bind, banks that are making corporate finance more expensive and seeing defaults increase. “It all affects each other,” Jeromes says. As long as the war continues and Corona creates uncertainty, things will not improve.
You say this will be worse than the Corona crisis, much worse? Is it a severe crisis, like the one that occurred during the financial crisis?
It’s really better to compare it to the scale of the financial crisis. During Corona, you saw the demand collapse because you were no longer able to consume. As a result, the saving capacity of households has risen sharply. Everyone was hoarding money. Now you see families struggling to pay the bills, and the ability to save dwindles. But don’t underestimate how hard European companies can afford.
Europe is bleeding from war and the United States has an interest in a long war?
The United States has no interest in stopping the war. The energy sector and their arms industry is booming. Their chemical pool is thriving in Houston, while Antwerp, the second largest, is under tremendous pressure. Energy-intensive companies that can produce outside Europe do so. Europe was hit twice by this crisis. A stronger dollar also makes oil more expensive for Europeans. The price of gas is a European problem anyway. Europe has only a few potential gas suppliers, I saw at a certain moment that gas prices in the United States were only a tenth of those in Europe.
Energy-intensive companies in Europe are under great pressure, but SMEs are also in the danger zone?
Many self-employed and small and medium-sized businesses, such as snack bar owners and bakers, will disappear. They cannot fully bypass the rising input prices and their margins are under pressure. Then the bakers have to lose bread in the supermarket. Anyone who can’t calculate their costs has a problem. As a rule, large companies have much more pricing power. Small and medium businesses are more vulnerable and we have a lot of them in Belgium.
You say the real shock is yet to come?
There is a delay factor. High energy prices, for example, are filtered only after a delay. Anyone who was still half covered would only receive half the shock. In addition, gas shock can worsen. For example, Gazprom could respond to a price ceiling by turning off the tap completely. Geopolitical tensions continue to hang over the market. These tensions could still increase.
More expensive energy and more expensive dollars means we are also entering inflation?
‘it’s a problem. This in turn leads to higher interest rates. The European Central Bank lags behind the United States in interest rates, which means that capital goes into dollars. If the ECB raises interest rates too much, Italian and French banks will be in trouble. You can already see that money market interest rates are rising and banks are actually making money more expensive, which is bad news for companies struggling to fund their working capital?
Companies waiting as long as possible to pay their bills?
Because costs are high, they lack working capital, their profit margins are under pressure and so they wait as long as possible to pay the bills themselves. This makes companies more in trouble for each other. This creates a domino effect. During Corona, governments were still able to collectively help businesses and families, but there is a problem in Belgium. The public debt goes back to Italian conditions. A lot of government money has already been spent on Corona and energy. Belgium at its borders.
Many companies still have tax debts as a result of the postponement of payments during Corona. It is feared that companies will accumulate debt, including the increasing interest burden. This can only be kept for a certain period of time.
Do you expect an increase in bankruptcies?
“We are already seeing a rise in bankruptcies in Belgium by 39 percent this year, but it is still below the pre-corona level. Until recently, we thought the number of bankruptcies would rise by a quarter next year, but next month we’ll come up with new estimates that will be even higher. The problem is that the crisis comes at a bad time. Many companies were still recovering from the Corona crisis.
You are a credit insurance company that insures companies against default. What do you see on the site?
“Last quarter we saw claims rise 60 to 70 percent due to big tickets. Take for example a file like Makro Metro. That company was taken over and three months later it got into Concordat. This is something no one expected soon after the acquisition. My advice to companies is to make sure they are as widespread as possible in relation to clients.Customer defaults are the main cause of bankruptcy.Currently, default hedge rates haven’t gone up yet, but I expect them to go up.
When do you think we will cross the pain threshold?
“The fourth quarter of this year and the first of next year will be really bad. The German industry is under heavy pressure and we will feel that too. Just hold on to the tree branches.
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