French Bankruptcies Hit a 33-Year Low as State Aid Masks Reality

(Bloomberg) -- Call it the prop-up effect. As France lived through its worst economic slump since World War II, business failures paradoxically slid to the lowest in 33 years.The number of bankruptcies and firms seeking protection from creditors or entering receivership fell 38% in 2020, as government aid in the face of the coronavirus pandemic kept French companies afloat, according to figures gathered by enterprise-data firm Altares. That may foreshadow a wave of defaults in 2021 and 2022, said Thierry Millon, its head of research.

Like elsewhere in Europe, France stepped in with billions of euros to bolster companies and preserve jobs. Business failures in the country fell to 32,184 last year, about 20,000 fewer than a year earlier and the lowest since 1987, according to Altares. Without government measures such as guaranteed loans, partial unemployment support and a delay on insolvency declarations, Millon estimates 80,000 companies would have faced default or gone bust.

“The number is a statistical anomaly, not an economic reality,” Millon said. “There are weak companies that only survived because of the government aid, and once the public aid starts being switched off, they’ll tumble quite quickly.”

Finance Minister Bruno Le Maire has predicted a difficult first quarter for the French economy with a significant rebound possible in the second half. The Bank of France expects the French economy to expand 5% in 2021 and in 2022 after an estimated 9% contraction last year.

As the economy returns to normal, government aid gets wound down and loan repayments come due, business failures may climb to 55,000 in 2021 and more than 60,000 in 2022, compared with 52,002 in 2019, according to Altares.

Helping Everyone

The government “spent a lot of money, but the money was handed out a little blindly -- the idea was to help everyone,” Millon said. “There are companies that are scraping by, and you can’t just subsist for a long time. Of the 20,000 that were spared, not all can survive.”

Even amid the lower trend, bankruptcies and insolvencies rose in some parts of the economy, including a 3.1% increase for travel agencies and a 22% jump for retailers of travel goods amid a tourism slump. Butchers faced a 16% rise in defaults as restaurants were shuttered.

The trend for this year will become clear in February and March after companies draw up their 2020 accounts, according to Millon. He expects more failures in consumer-targeted businesses such as restaurants, non-food retailers, hair dressers and beauty salons.

In the second half, policy makers’ challenge will be to help companies beef up their balance sheets and cash positions to meet a demand recovery, the Altares research head said. In 2022, the situation for French companies will change again as corporate loans taken out to survive the economic crisis start being called, Millon said.

Picking Survivors

Companies may need around 1 trillion euros ($1.2 trillion) in equity after coronavirus restrictions eroded their revenues, while existing programs as well as private funding will only be able to cover between 400 and 550 billion euros, the Association for Financial Markets in Europe said in a report on Tuesday.

“We didn’t quite nationalize the economy, but if you put that much money in, we’re not far off,” Millon said. “The challenge for the economy and the government in 2021 will be to distinguish which companies are viable and should get help, and which you should accept to stop helping. There’s a sorting to be done.”