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Global Insolvencies expected to rise

01 June 2012 Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation

The ongoing deterioration in the economic outlook of Europe has forced European Credit Insurance company, Euler Hermes to revise its 2012 outlook for global corporate insolvencies – a 3% rise is now foreseen as opposed to an earlier expectation of a 5% fa

A systemic break-up of the Eurozone cannot be excluded while Spanish banks scramble to recapitalise themselves as their borrowing costs soar. Apart from the all-but nationalisation of Spain’s 4th largest bank, Bankia, three savings banks namely Ibercaja, Liberbank and Caja3 – are said to be studying a possible merger which would create Spain's seventh-biggest lender. And as the UK re-entered recession, retail bankruptcies were recently reported to have risen 38% in the first quarter of 2012 compared to the first quarter of 2011.

We have to express our unease on the outlook for the European economy this year and potentially into 2013 and the resultant impact on corporate health, implying rising payment defaults and global insolvencies. Banks are under pressure to restore strength to their balance sheets and growth forecasts are being trimmed across the globe as rising unemployment, poor sentiment and weak demand cloud the horizon. A further pick-up in company closures next year may push the insolvency index very close to record highs.

The challenge for South African exporters is to select specific markets and sectors to ensure a better chance that they will be paid. Moreover, shipping on open terms given such uncertainty is foolhardy, especially considering the potential contagion from bank failures. Payment protection amidst this volatility is paramount in our opinion.


    
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