There is illiquidity and there is insolvency, and gushers of new debt-based liquidity won’t make the insolvent solvent. From Daniel Lacalle at dlacalle.com:
Misguided lockdowns have destroyed the global economy and the impact is likely to last for years. The fallacy of the “lives or the economy” argument is evident now that we see that countries like Taiwan, South Korea, Austria, Sweden or Holland have been able to preserve the business fabric and the economy while doing a much better job managing the pandemic than countries with severe lockdowns.
One of the most alarming facts about this crisis is the pace at which bankruptcies are rising. Despite an $11 trillion liquidity injection and government aid in 2020, stocks and bonds at all-time highs and sovereign as well as corporate yields at all-time lows, companies are going bust at the fastest pace since the Great Depression. Why? Because a solvency crisis cannot be disguised by liquidity.
Trillions of liquidity are giving investors and governments a false sense of security because yields are low and valuations are high, but it is a mirage driven by central bank purchases that cannot disguise how quickly companies are entering into long-term solvency issues. This is important because soaring bankruptcies and the rise in zombie companies means less employment, less investment and lower growth in the future.
Liquidity only disguises risk, it does not resolve solvency issues driven by collapsing cash flows while costs remain elevated.
According to the FT, large US corporate bankruptcy filings are now running at a record pace and are set to surpass levels reached during the financial crisis in 2009. As of August 17, a record 45 companies each with assets of more than $1bn have filed for Chapter 11 bankruptcy. In Germany, about 500,000 companies are considered insolvent and have been zombified by a pointless “insolvency law” that simply extends the pain of businesses that are technically bankrupt. In Spain, the Bank Of Spain alerted that 25% of all companies are on the verge of closing due to insolvency. According to Moody’s estimates, more than 10% of businesses in the leading economies are in severe financial stress, many in technical bankruptcy.