ECB: NFCs’ Indebtedness Could Limit Medium-Term Economic Growth

22 September, 2021

By David Barwick – FRANKFURT (Econostream) – The health of non-financial corporates has been negatively affected by the pandemic and their debt burden could hamper the medium-term recovery, the European Central Bank said on Wednesday.

In a pre-release from the sixth economic bulletin of the year, due out Thursday, the ECB said the pandemic had ‘had a marked impact on corporate health in the euro area.’

Although a liquidity crisis was avoided, ‘non-financial corporate profitability, operating efficiency and solvency came under pressure during the lockdowns’, it said. ‘Looking ahead, the uneven high level of gross and net indebtedness across countries, sectors and firm size could limit the strength of economic growth over the medium term and increase the risk of a rise in firm defaults.’

‘It is likely that the impact of the pandemic on NFC vulnerabilities will be long-lasting, given the high level of heterogeneity in cash holdings between firms’, the ECB said.

Since mid-2020 there has been a decrease in NFC vulnerabilities and a better corporate leverage situation, the report said, leaving vulnerabilities overall near the historical average as of early this year. ‘However, the vulnerabilities of small and medium-sized enterprises remain high and also mask significant heterogeneity across countries and sectors’, it said.

As for insolvencies, ‘it cannot be excluded that many firms, particularly those in sectors more affected by the pandemic, could still be forced to file for bankruptcy, especially if the support measures are lifted too early or bank lending conditions tighten significantly’, the ECB said.

Since the outbreak of the pandemic, the non-financial corporate sector in the euro area has faced negative profit growth, the pre-release said. Without companies’ precautionary saving and about €550 billion in government support, ‘corporate savings net of capital depreciation would have been significantly negative in 2020’, it said.

‘Firms’ access to credit and their financing conditions received substantial support from the new targeted longer-term refinancing operations (TLTROs), the pandemic emergency purchase programme (PEPP), government loan guarantees and supervisory measures’, the pre-release noted.

Companies also took steps to shore up their liquidity conditions, among them ‘delaying and cancelling investment projects to the extent possible’, which ‘may, however, leave longer-term scars in the economy by hampering future growth potential’, the report said.

The ECB described the NFC’s cash reserves to meet interest payments as ‘comfortable’, but noted that consolidated gross indebtedness had increased by 18.9 percentage points since end-2019. As 43 % of the increase in the gross debt ratio since then reflected risen debt financing, ‘only part of the increase in the debt ratio can be expected to passively reverse in the coming years if the economy returns to a more normal growth path’, it said.

‘However, as the situation normalises, a decline in cash holdings could support a reduction of gross debt, as suggested by net debt developments’, it added.