Major insolvencies—companies exceeding 50 million euros of turnover—took a sharp turn upward during the first quarter of 2017, according to Euler Hermes’ Economic Outlook Summer 2017 report.
Overall, the number of insolvencies is expected to stabilize over the next two years. The trade credit insurer expects insolvencies to drop 1% this year and then rise 1% next year. Quarter-on-quarter, however, 30 more major insolvencies occurred in first-quarter 2016 than the year prior, and “the cumulative turnover of insolvent companies jumped by 3.4%, reaching EUR19.1bn,” the report says.
Insolvencies “tend to be increasingly concerning major firms,” Euler Hermes noted. The spillover then affects smaller companies, it added.
“Companies should beware of a domino effect, as the overall severity of failures is worsening,” it said. “The spike in the number of too-big-that-failed could have serious knock-on effects on providers along the supply chain. Retail bankruptcies in the U.S. and U.K., for example, might impact textiles, electronics and manufacturing worldwide.”
The number of major insolvencies jumped 68% compared with first-quarter 2016, or from 44 to 74 companies, while the cumulative turnover rose 34% to 19 billion euros due to a rise in companies with turnovers from 101 million to 1 billion euros.
The last four quarters noted a similar trend as the number of major insolvencies rose by 43% in the last four quarters compared with fiscal quarters 2 through 4 in 2015 and first-quarter 2016, the report says.
The 20 largest failures accounted for 70% of the global cumulative turnover: Eight were in the U.S.; five, in Central and Eastern Europe; five, in Western Europe; and two, in Asia Pacific.
While Europe registered the largest increase in the number of large bankruptcies (49), North America experienced the largest rise in turnover (8.7 billion euros)—nearly half of the global total.
Services and retail were the most affected sectors, with seven and nine more major insolvencies, respectively, then first-quarter 2016.
Although Europe recorded most of the insolvencies, North America had the largest rise in the cost of major insolvencies. Increases, however, are expected for Latin America (8% and 11%, respectively in 2017 and 2018), Africa (10% and 6%) and Asia-Pacific (3% both years).
The number of insolvencies in North America is expected to plateau this year and increase 5% next year due to rising interest rates, increases in working capital requirements and business demography.
In Central and Eastern Europe, ongoing difficulties in major countries such as Poland, Russia and Turkey are expected to offset improvements in smaller countries, while Western Europe is expected to register “a slower pace of decline in bankruptcies.”
Chris Kuehl, Ph.D.
The latest data from Markit shows a substantial recovery in the eurozone; one that may be picking up speed in the second quarter. The numbers in May were at 56.8. In June, they stayed very close at 56.3. The expectation had been for a decline to 55.5, but the growth in France has been impressive and rapid.
There is still a good bit of fragility as far as the global economy is concerned, however. Many suggest eurozone recovery is not assured, but this surge has already had a positive impact on economies outside Europe. The data in the latest Purchasing Managers’ Index (PMI) suggests there are three motivations for this recovery.
The first and arguably the most stable is the surge in the German economy. The slowdown of six to nine months ago has been replaced with more robust growth. The estimates are that Germany will be able to grow at between 1.5% and 2% over the next several quarters. Consumers in Germany are more engaged than they were just a few months ago. There has also been a boost in export demand. Trade-related growth has been due to better numbers in Europe as a whole, but also because of the better economic news in the U.S. and Asia. German exports are not oriented toward consumer products and thus Germany needs other nations to experience enough growth to boost their industrial expansion. That has been taking place in much of the world of late. It also helps that German politics seem to have calmed down a little with Angela Merkel back in the lead as far as the upcoming election is concerned. Economic growth is good for Merkel. It seems that Merkel is also good for economic growth.
The second motivator is perhaps the most dramatic because it was not expected at the start of the year. As important as Germany is to the EU economy, France is a very close second. This country has been missing in action for years. The Hollande government seemed incapable of sticking to a policy direction for more than an hour and the growth rate plummeted as joblessness spiked. It was an economy that was dead in the water. That was largely what provoked the rise of populism. The French were convinced that Marine Le Pen and the National Front would come to power in the elections and the business community was in a panic. Nearly everything seemed to stop as the country tried to figure out what that world would look like. In the end, the French handed Le Pen a stunning defeat and Emmanuel Macron became president. Shortly after that, he won control of the National Assembly. Not that any of the underlying issues affecting the French economy have gone away, but the opportunity is there and the business community has responded with relief and optimism. Time will tell as far as how much this enthusiasm is justified.
The third motivator relates to the way that countries are now connected. If there is anything the last few years have taught, it is that no country can really pull itself out of decline and recession without help. The U.S. economic recovery over the last few months has been rooted in an expanded export role. The U.S. economy is dependent on exports for at least 14% of its GDP, but Germany relies on exports for almost 55%. France needs exports for more than 45% of its economic growth. Much of the export activity in Europe is between Europeans, but it has taken expanded sales to the U.S. and to China for Europe to start pulling itself out of the doldrums.
This Week’s New Postings
New Discussion Board Post
News & Updates from Credit Risk Insurers & Banks
Euler Hermes: Weekly Export Risk Outlook
Euler Hermes: Politics and markets will reconnect
Euler Hermes: Big bang? Financial markets and systemic political change
Strategic Global Intelligence Briefs
The number of active correspondent banks across all currencies decreased by 6% from 2011 through 2016, according to the Financial Stability Board. The decline was more than double for U.S. dollar and euro relationships, which fell by about 15%.
These two currencies account for nearly a third of correspondent accounts and represent “the vast majority of the value of payments made through SWIFT messages(82% in December 2016), against 5% for the next most used currency, the British pound (GBP),” according to the board’s FSB Correspondent Banking Data Report, released July 4.
Eastern Europe correspondent banking relationships fell 16%; Europe (ex Eastern Europe), 15%; Oceania, 12%; and the Americas (ex North America), 8%. Last year, the Caribbean and the small states of the Pacific (Melanesia, Micronesia and Polynesia) are the four sub-regions with the highest rates of declines, close to or above 10%.
“The decline in correspondent banking relationships appears to lead to a greater concentration, where countries and banks rely on fewer correspondent banks, and may lead to longer payment chains, which means that a higher number of intermediaries are involved in processing the same payment,” the FSB said. “The countries where banks are most affected by exits of foreign correspondent banks tend to be small economies or jurisdictions for which the compliance with standards for [anti-money laundering/combating the financing of terrorism] is insufficient or unknown.”
The report lists several reasons for the decline:
- industry consolidation
- reduced profitability from these activities
- overall risk appetites of correspondent banks
- reasons related to AML/CFT or sanctions regimes
The data report contains information collected from an FSB survey of over 300 banks in nearly 50 jurisdictions plus data provided by the Society for Worldwide Interbank Telecommunications (SWIFT) relating to payment traffic over SWIFT.
The FSB launched its four-point action plan in November 2015 to assess and address the decline in correspondent banking. The plan covers:
- Further examining the dimensions and implications of the issue;
- Clarifying regulatory expectations, including guidance from FATF and BCBS;
- Domestic capacity-building in jurisdictions that are home to affected respondent banks; and
- Strengthening tools for due diligence in correspondent banks.
The Arab Monetary Fund has been working on a way to manage the decline as it finalizes plans for a regional cross-border payments and settlements system. “The Arab Regional Payments System (ARPS) will act as a correspondent for its participants such as banks and financial institutions through a single, centralized platform for cross-border payments,” Reuters reported. “It will also aim to boost the use of local currencies in cross-border money flows. Many transactions in the Arab world have long been done in U.S dollars.”
To learn more about correspondent banking relationships, FCIB is hosting two upcoming webinars, both delivered by Amy Sahm, senior vice president and manager for Fulton International Group in Lancaster, PA. “Correspondent Banking: The Basics,” presented 10 a.m., July 11, will cover the basics of how banks collaborate and build strategic relationships to execute letter of credit transactions, provide credit support and facilitate global payments. “Correspondent Banking: Best Practices,” presented 10 a.m., July 18, will cover the regulatory governance around correspondent banking, risk management steps, key benefits of specific correspondents, typical revenue sharing arrangements and the evolution of the industry.
Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
China-U.S. trade talks near 100 days with North Korean jolt. For China, the most important achievement of the 100 days of trade talks with the U.S. might be keeping its counterpart at the table. Negotiations due to end on July 16 have yielded some progress already, such as getting American beef back into Chinese stores, a small step toward addressing the $347-billion U.S. deficit on $578.6 billion in trade last year. But even amid continued engagement, major breakthroughs look less likely. (Business Mirror)
EU, Japan pledge to tie the trade knot within months. The European Union and Japan agreed to the broad lines of a trade deal on July 6, promising to iron out the last details within months. European Council President Donald Tusk stressed that the deal is not just about trade, but it is about shared values and committing to the highest standards in areas such as labor, safety, environmental and consumer protection. (EurActiv)
Japan’s economy gains momentum in struggle to escape deflation. Japan’s economy is running the hottest relative to capacity since the global financial crisis. More than four years after the Bank of Japan launched its radical monetary easing, key conditions are aligning in its long battle to truly escape from deflation. The latest reading of the nation’s output gap, released on July 5, is another milestone on the journey to that escape, economists say. (Bloomberg)
Qatar’s outlook cut by Moody’s amid Saudi-led blockade. Despite Qatar aiming to ramp up its lucrative LNG (liquefied natural gas) exports in the midst of a tense diplomatic crisis, ratings agency Moody's has cut its outlook on the country's sovereign credit to "negative" from "stable." The ratings agency said the change was due to the economic and financial risks arising from the ongoing dispute with Saudi Arabia and its allies, which accuse Qatar of supporting terrorism. An allegation the country has denied. (CNBC)
Trump heads to G20 as trade war brewss. U.S. President Donald Trump will attend his first G20 Summit in Hamburg this weekend, with experts warning that he could be about to trigger a full-on trade war. Trump has been threatening for weeks now to unveil import restriction measures, using an arcane U.S. statute to justify tariffs on the imports of aluminum and steel. (Global Trade Review)
Brazil's president faces criminal charges and 2% approval rating—but clings on. Brazil´s attorney-general has charged the president, Michel Temer, with “passive corruption”—more commonly known as accepting a bribe. The Supreme Court will now send the charge to congress’ lower house, the Chamber of Deputies, which will have to decide whether the court can try him. If it does, Temer will have to step aside for the duration of the trial, and the president of the house, Rodrigo Maia, would become interim president. (EconoTimes)
Pakistani rupee tumbles after devaluation. Seeing its biggest drop in nine years, Pakistan's rupee plummeted 3.1% against the dollar on July 5 after the central bank devalued the currency to address a lack of foreign reserves and a growing deficit in the external account. The unexpected plunge led to a shortage of foreign currency. The U.S. dollar rose to Rs 108.50 before settling at Rs 108.25 against Pakistan’s rupee. (India Business Today)
International trade currency impact eases in 2017. A recent report measuring the impact of currency fluctuations on first quarter 2017 corporate earnings shows the total negative impact as 67% smaller than the first quarter of last year. The report “shows that many multinationals are still not aware of what their risks are. Those who are not managing their foreign exchange risk and hedge ratios will likely be caught off guard by a spike in volatility that is sure to come.” (Global Trade Magazine)
Here’s what central banks may do in the rest of 2017. Since the crisis, the top 50 central banks in the world cut interest rates over 700 times, Alex Dryden, global market strategist at JPMorgan Asset Management, tells CNBC. “After nearly a decade, growth is beginning to pick up across all major regions. The synchronized upswing in international economies has seen global equities rally by 14.7% since October 2016. But with a healthier diagnosis for the global economy, central bankers are beginning to wean the patient off the ultra-loose monetary policy medicine.”(HSN)
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations