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Central Bank paper shows numbers of insolvencies are lower

Written by Robert McHugh, on 20th Nov 2020. Posted in General

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The Central Bank published an Economic Letter yesterday on company births and insolvencies in the pandemic. It notes that new company registrations declined sharply in the acute phase of the pandemic in the second quarter between March and May (-36%) and whilst evident in all sectors, it was most pronounced in the leisure and hospitality sector.

There was evidence of an improvement over the summer to almost pre-pandemic levels in September, though trends will still see 2020 below 2019 levels (year to date at -c.10%). Whilst new registrations were lower, the data also shows that liquidations also fell significantly in the second quarter, though this appears to have been logistical through the inability to convene physical meetings with creditors, with trends between June and September returning to pre-pandemic levels, despite the scale of the shock.

The Letter suggests that whilst insolvencies typically follow the economic cycle, the cumulative effect of government business supports, loan payment breaks, other forms of forbearance from other creditors, and pre-existing liquidity buffers are likely applying downward pressure on the insolvent liquidation rate. Goodbody Stockbrokers say these supports are not going to last indefinitely.

According to Goodbody Stockbrokers, "The findings of fewer new company registrations yoy is hardly a surprise. Whilst it is interesting that insolvency levels have only been tracking at pre-Covid levels, being rational, this probably makes sense given all the fiscal supports for SMEs. Indeed, the wage subsidy scheme in the October budget was extended from March 2021 to December, buying more time."

They added, "In general, these supports will continue to keep the Probability of Default (PD) in check, and keep companies alive for longer, but at some stage they need to get back on their own two feet."

Source: www.businessworld.ie

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