The corporate bankruptcy wave will get even uglier

BUSINESS bankruptcies are surging around the world, in some countries reaching volumes not seen since the aftermath of the 2008 financial crisis. It is likely just the start of a wave of corporate defaults: A decade of cheap money instilled a false sense of invincibility in business executives and private equity managers who forgot that bust normally follows boom. Now, a combination of weakening demand, surging inflation, over-indebted balance sheets and much higher borrowing costs will prove too much for weaker borrowers.

US bankruptcies in the first six months of 2023 were the highest since 2010 among the companies covered by S&P Global Market Intelligence. In England and Wales, corporate insolvencies are near a 14-year high. Swedish bankruptcies are the highest in a decade, while in Germany bankruptcies jumped almost 50 per cent year on year in June to the highest level since 2016. In Japan, bankruptcies are at their the highest in five years.

Insolvencies normally spike once a recession is already underway, but businesses are collapsing even as labour markets and corporate profits show surprising resilience. One explanation: Generous government financial aid programmes in the pandemic and a relaxation of the rules for when companies must file for bankruptcy led to an unusual hiatus in corporate failures in 2020 to 2021.