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News : EU Economy Last Updated: Mar 19, 2014 - 9:30 AM


Diverging trends in business insolvencies in Germany and France
By Finfacts Team
Mar 19, 2014 - 9:26 AM

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The divergence between the trends in the number of business insolvencies in France and Germany continued in 2013. Last year a total of 62,698 French firms (+2.5% vs. 2012) and 19,488 German companies (-8.6%) filed for insolvency. In the period 2002 and 2006 the number of new insolvency proceedings followed a similar pattern in both countries. Since then the figures have moved in different directions.

Deutsche Bank research shows that a key determinant of business insolvencies is the economic situation. In Germany, the number of insolvencies, however, initially rose in line with GDP around the turn of the millennium (see chart above). Although insolvencies are in any case a lagging economic indicator, this development was probably linked to the reform of insolvency legislation in 1999. As a consequence of this reform as well as some additional amendments in 2001, Germany's insolvency legislation was recast in the image of the United States' Chapter 11. The objective was to provide a larger number of insolvent companies with the option of orderly recovery and restructuring as an alternative to liquidation. In the years that immediately followed the reform, the number of filings for insolvency thus increased despite the growth in GDP. Between 2002 and 2010 then came a pronounced anti-cyclical trend in German company bankruptcies.

In France, too, a comprehensive reform of insolvency law modelled on the US Chapter 11 (“loi de sauvegarde”) came into effect in 2006, with the result that insolvencies rose despite the good economic situation. In general, however, the figures for France also tend to indicate an anti-cyclical pattern of business insolvencies.

Dr. Stefan Vetter and Jennifer Köhler, economists at DB say that the number of insolvencies seems to have become less dependent on the business cycle in both countries since 2008. This seems to apply to Germany in particular in the years since 2010: despite faltering growth, the number of business insolvencies dropped significantly, as shown in Chart 1. According to calculations by Euler Hermes, GDP growth of more than 2% was required to keep insolvencies steady in Germany and France between 2000 and 2008. Between 2008 and 2013, by contrast, the GDP growth requirement was just 1% in France, and a mere 0.5% in Germany.

One reason for the growing disconnect from the business cycle could be the tendency towards more professional liquidity management especially at smaller firms, which helps to maintain payment flows even when cyclical conditions are weak. In addition, improved capital ratios are making companies more resistant to cyclical shocks. The differing development in the reliance on the cycle is likely to widen the gap between the French and German insolvency trends.

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