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Surge in Corporate Bankruptcies: A Shift in Economic Climate

A surge in corporate bankruptcies across advanced economies, particularly in the EU and US, is attributed to rising interest rates and the end of Covid-19 support.

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Ebenezer Mensah
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Surge in Corporate Bankruptcies: A Shift in Economic Climate

Corporate bankruptcies are on the rise across advanced economies, with notable surge within the European Union (EU) and the United States. A significant 13% increase in company defaults has been observed in the EU over the nine months leading up to September, marking the highest point in eight years. This increase is attributed to the rise in interest rates and the end of Covid-19 assistance programs that previously supported businesses throughout the pandemic. The United States, which had been experiencing a decade-long trend of diminishing corporate bankruptcies, has seen a reversal with a 30% uptick in the 12 months concluding in September. On a larger scale, Germany, the EU's most substantial economy, has also seen a 25% increase in corporate bankruptcies from January to September. These figures signal a shift in the economic climate, with businesses facing heightened financial difficulties in the post-pandemic world.

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Increasing Borrowing Costs and End of Pandemic Support

Analysts, including Neil Shearing, Chief Economist at Capital Economics, attribute the spike in corporate bankruptcies to the escalation of interest rates coupled with the cessation of pandemic aid. The cost of debt servicing, rollback of pandemic support, and high energy bills have all contributed to this alarming trend. Sectors like transportation and hospitality are among the most affected, raising concerns about future economic impacts.

Global Corporate Bankruptcies Surge

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Data from various national courts and statistical offices reveal a worrying trend in corporate bankruptcies. The withdrawal of Covid-19 aid and increasing interest rates are driving this surge. The collapse of 'zombie' companies, which were heavily reliant on government support during the pandemic, is another factor contributing to this upward trend. Moody's anticipates the global speculative-grade default rate to rise in 2024, surpassing the historical average.

Case Study: Ebix Inc.

One notable case is that of Robin Raina-led Ebix Inc., which filed for bankruptcy in the US after failing to repay over $600 million to lenders. The bankruptcy of Ebix’s US business could have potential implications for its Indian unit, EbixCash, which operates in forex, gift cards, and payment services. Despite this, EbixCash has dismissed any implications from the filing, stating that it is a standalone, fundamentally strong, and growing operation. Ebix Inc. had taken on substantial debt to finance aggressive expansion across countries, with outstanding borrowings of $639.3 million as of December 2022.

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