The lockdown which occurred as a result of the coronavirus pandemic increases the probability of corporate bankruptcy, according to an analysis coauthored by an academic from Queen Mary University of London.
The research, which focuses on Germany and the UK, is based on corporate financial statements from 2014 to 2018.
It shows that in the United Kingdom, 73 percent of firms that were closed during the pandemic were not able to cover expenses and in Germany the figure was 81 percent.
Since the outbreak of the COVID-19 pandemic many countries have shutdown large parts of their economy.
While this helps to mitigate the spread of the virus, the shutdown comes with severe economic costs.
The researchers found that that firms lost turnover during the shutdown but costs were hardly reduced.
In particular, many firms needed to serve their debt and pay interest to banks.
In accommodation, for example, companies in Germany and in the United Kingdom were found to have lost around 50 percent of turnover in March 2020 compared to one year before.
The transport sector, travel agencies and many retail sectors are also heavily affected, according to the analysis.
The longer a shutdown lasts, the more firms will not be able to cover their interest expenses.
In a one-month shutdown, 81 percent of companies in affected industries in Germany and 73 percent of firms in the United Kingdom, came under financial distress.
Financial distress is defined as a situation in which interest expenses exceed earnings before interest and taxes.
If the shutdown lasts longer, about three months, nearly all firms in shutdown industries will face risk of bankruptcy and many firms in the other sectors will be financially distressed as well, according to the research.
Both Germany and the United Kingdom have implemented furlough schemes which reduce salary payments and social security contributions of firms.
This helps to some extent.
However, the researchers point out that even if the complete cost of employees is refunded by the state to shutdown firms, the risk of bankruptcy increases dramatically.
Even in this case the risk of bankruptcy increases to 71 percent in Germany and to 61 percent in the United Kingdom.
According to the paper, there are small differences between size groups of firms, but in general all size groups will exhibit a severe increase in the probability of bankruptcy. ■