'Bankruptcy wave' threatens Europe as interest rates bite

OECD Says European Central Bank Combats Inflation 'Belatedly' Photo: Alex Kraus/Bloomberg

The threat of a 'bankruptcy wave' » the eurozone economy as companies accustomed to ultra-low borrowing costs suffer from rising interest rates, the OECD has warned.

More companies are already failing due to high levels of debt and the withdrawal of support in the pandemic era, with businesses in Spain are particularly vulnerable to this.

“In some countries, both households and firms are heavily indebted and therefore vulnerable to increased financing costs. High levels of non-financial corporate debt threaten a wave of bankruptcies,» says the latest OECD Eurozone Economic Review.

pandemic.”

While businesses shrink, indebted households are also at risk as the OECD calls for close monitoring of the housing market.

Economists are forecasting growth of 0.9% this year and 1.5% next year, suggesting a slowdown rather than a deep recession.

But they said it was very unusual as interest rate hikes to suppress inflation usually provokes a recession, or at least a very serious recession.

“Looking at historical data, it seems that there were no events after 1950. a precedent for a significant decline in inflation caused by a US, Canadian, German or UK central bank that does not entail significant economic losses or recession,” the OECD said.

3108 Germany GDP stagnation

“Declining GDP” inflation seems unlikely without a corresponding increase in unemployment in the short term.”

But economists have stressed that it is vital to get inflation under control despite the risks to growth, especially as the European Central Bank has begun to tackle the issue of the cost of living “ late».

“Monetary policy should remain tight until core inflation kicks in. pressure is steadily declining,” the OECD said. The ECB raised its overall deposit rate to 3.75% from minus 0.5% from July 2022.

Analysts also said governments need to limit borrowing and cut energy support spending to avoid creating additional inflation pressure.< /p>

«Fiscal policy should become sufficiently restrictive,» the report says.

“Measures to ease the energy crisis have further increased public debt and should be more targeted and eventually reversed even if energy prices do not fall further.”

Rising interest rates are already being felt.

According to a survey by S&P Global, an index of purchasing managers, the eurozone construction industry contracted in August for the 16th month in a row. businesses.

The recession deepened, with activity falling at its fastest pace this year, with housing construction falling particularly sharply.

Economist Andrzej said this came after poor performance for manufacturing and the services. Nomura's Szczepaniak said «Europe is heading towards a recession abyss.»

«Composite manufacturing PMIs for both the eurozone and the UK are now firmly in downtrend territory, suggesting that GDP growth is likely to be negative in both jurisdictions in the third quarter,” he said.