Increase of Corporate Debt May Put a Mark on Post-Pandemic Europe for Years

Even when (not if) coronavirus pandemic has passed, Europe could find the most damaging economic legacy is not the vast piles of government debt but the hundreds of billion euros in liabilities that have landed on companies.

Businesses were forced to take loans to survive the lockdowns that cut off their cashflows this year. When that crisis support ends, their finances risk being stretched to breaking point, and small firms are already sounding the alarm.

Politicians are being asked to help viable companies clean up their balance sheets, or let them grapple with debt burdens that could cripple investment and job creation for years to come.

"With every week that goes by, the chances of survival for closed businesses are thinning," said French business man running small enterprise. "We've never seen a crisis on this scale with systemic risks looming in the background."

The risk extends beyond the companies themselves. Battered balance sheets could spark a cycle of defaults and bankruptcies that would hit the banking sector and deepen the downturn.

Euro-area companies added more than 400 billion euros ($475 billion) in debt over the first half of this year, compared with 289 billion euros in the whole of 2019, according to Eurostat data. The European Commission warned last week that "servicing debt could be challenging particularly in sectors impacted by the pandemic in a more lasting way."

In Germany, which has so far come through the crisis better than most of its peers, the Bundesbank predicts that insolvencies will rise by more than 35% by the first quarter of next year. A survey by SME United, another lobby organization, showed around half of small and medium-sized businesses in France and Italy...