A Statistical Default Study on the Effects of the Expiry of Government Aid Measures on the Default Risks of Austrian Firms
Vienna (OTS) – Univ.-Prof. Dr. Walter S. A. Schwaiger, head of the research area “Financial Economics and Controlling” at the Institute of Management Sciences (IMW) at the Vienna University of Technology has analyzed the defaults of domestic companies in the pandemic years 2020 and 2021 using data from the Creditreform business database, which includes all companies and self-employed persons based in Austria. The objective of this default study (Statistical Default Study) is to determine the impact of the termination of the extraordinary support measures and thus the current default risk of Austrian companies.
Corona bubble shrinks, default risk rises to 1.60%
The extraordinary support measures set by the government to contain the Covid 19 pandemic have had an impact. The 2020 and 2021 default rates have fallen to historic lows of 0.76% and 0.81%, respectively. Correspondingly, corporate insolvencies have fallen by around 40%. The last time there were so few insolvencies was 30 years ago. However, these lows give a distorted picture of future default risk, especially as no such support measures are planned for subsequent years.
In 2020 and 2021, default rates of 1.88% and 1.21% were expected. If the actually realized default rate of 0.76% and 0.81% is subtracted from these rates, the “Covid 19 bubble” of 1.12% for 2020 and 0.40% for 2021, created by extraordinary support measures, results.
The sharp reduction in this Covid 19 bubble by 0.72 percentage points is due to the extensive continuation of government aid packages and the economic improvement in 2021, which kept the realized default rate low and reduced the expected default rate.
If the economic improvement continues, it is now expected that the huge Covid-19 bubble created in 2020 and shrunk by about 2/3 in 2021 will be able to unwind without disruptive collapses in the corporate sector. Contrary to original fears, the Covid 19 bubble did not burst spontaneously, but was reduced to a more or less moderate 2/3 by the continued support measures and the economic recovery. In the meantime, however, new economic ‘storm clouds’ have appeared, in particular supply bottlenecks and labor shortages, which represent a kind of ‘long covid disease’, as well as exploding energy and raw material prices, the Ukraine war and its consequences, the highest inflation rates for decades and the interest rate hikes now also pending in Europe. These clouds are likely to make themselves felt in a renewed significant economic downturn and cause future default rates to rise sharply again.
Univ.-Prof. Walter Schwaiger comments: “The discontinuation of government aid measures will not necessarily cause the “Corona bubble” to burst. The disruptive shock has failed to materialize. Rather, it depends on how the polycrises and their effects on the general economic situation and on the situation of companies can be cushioned.”
Default rate and economic development
If we look at the annual default rates compared to the change in real GDP, we see a uniform development around a default rate of about 1.40% for the last twelve years (with the exception of the year of the 2009 financial crisis).
However, the years 2020 and 2021 represent a “giant exception.” The default rate of 0.76% realized in the Corona crisis year 2020 is not only much lower than the default rate of 1.15% in the still economically normal year 2019. Moreover, it is even diametrically opposed to the development expected in the Corona-related economic slump. The actual default rate that has occurred is thus distorted compared to the actual economic situation. The reason for this is the extraordinary support measures mentioned above.
As the economy (provisionally) improves, the default rate will also slowly return to the “normal level” of 1.20%. For the current year 2022, Univ.-Prof. Schwaiger expects the default rate to rise to 1.60%. This is made up of the normal level of 1.20% and the “corona bubble” of 0.40%. In absolute terms, this means that around 5,700 companies are at high risk of insolvency. Austria thus returns to the pre-pandemic level.
Data basis
To measure corporate defaults, this study did not use insolvencies but – as is customary in the banking sector – default events as defined by “Basel III” (Basel Committee on Banking Supervision). According to this definition, a company is considered to be in default if it is more than 90 days in arrears or if it is highly likely that it will not be able to meet its payment obligations. This measurement of credit defaults corresponds to the circumstances measured by the Creditreform creditworthiness index. This ranges from 100 (excellent creditworthiness) to 600 (insolvency). From a creditworthiness index of 500, a receivable is considered to be in default.
The calculations, which refer to the year 2021, are based on over 105,000 economically active companies.
Univ.-Prof. Mag. Dr. Walter S. A. Schwaiger
Institute for Management Sciences, Finance and Controlling (IMW) TU Vienna
Tel.: +43-1-5880133081
[email protected]
www.imw.tuwien.ac.at
Mag. Gerhard M. Weinhofer, Member of the Executive Board
Creditreform Wirtschaftsauskunftei Kubicki KG
Tel.: +43-1-218 62 20-551
[email protected]
www.creditreform.at
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