MNI EXCLUSIVE: German Bankruptcies To Surge-Mittelstand Heads

--Bankruptcies To Surge In Second Half

--Emergency Loans Difficult For Small Businesses To Obtain

By Luke Heighton

     FRANKFURT(MNI) - A second wave of Covid-19 infections would be "disastrous"

for Germany's economy, the heads of two of the country's largest Mittelstand

business associations told MNI, anticipating a second-half surge in corporate

bankruptcies and unemployment and pointing to the shortcomings of state-backed

loans in ensuring a future for smaller businesses.

     A law allowing companies to avoid reporting insolvency until September was

delaying the inevitable flood of bad figures following pandemic lockdowns from

March, said Ludwig Veltmann, of the Mittelstandsverbund.

     "In the first month our fear was that many companies would die. They did

not. That was in large part because over the last 10 years Mittelstand companies

had accumulated savings, which they were able to fall back on. If there were a

second wave, they do not have it, and the losses will be heavy," said Veltmann.

     --INSOLVENCIES POSTPONED

     Mario Ohoven, president of the Bundesverband mittelstandische Wirtschaft

Unternehmerverband Deutschlands, called for long-term relief for smaller

companies and added that the eurozone's biggest economy would "hardly be capable

of surviving another lockdown."

     "The impending wave of insolvencies is only postponed," he said in an

emailed response to questions, in which he anticipated a "significant increase"

in bankruptcies through 2021.

     Amongst the ranks of failures will be some unviable "zombie companies"

which have managed to obtain government assistance, said Ohoven, who expected

job losses to hit hardest in manufacturing - which had already experienced a

technical recession in 2019. Yet, even as jobless queues lengthen, some firms

face a shortage of skilled workers, exacerbated by restrictions on international

travel, he said.

     Many smaller businesses such as shops may simply fail to reopen from

lockdown closures, said Veltmann.

     "They may just exit the market silently, because it does not make economic

sense to start again. These companies are not registered in the insolvency

register, but abandoning them will also lose a large part of retail landscape."

     --LOANS HARD TO GET

     Both men pointed to difficulties for smaller companies in obtaining loans

made available by German development bank Kreditanstalt fur Wiederaufbau. KfW

passes on credits via commercial lenders which assume 10% of the risk, pushing

up rates and leading, according to Ohoven, to many borrowing requests being

refused. When credit is provided, its 3% interest rate compares to interest-free

official assistance in Switzerland, noted Veltmann.

     Loans should be provided directly by the development bank, said Ohoven, who

called for a "roadmap" for long-term assistance for SMEs, including the

abolition of the solidarity surcharge, a reduction of tax on electricity and a

permanent, uniform VAT reduction from 19% to 15%.

     The government has enacted a temporary 3-percentage point VAT cut, which

Veltmann called "horrible."

     "It is such a big bureaucratic change, requiring so much back and forth

over agreements that have already been made, that it will cost millions. And we

will have to do the same thing again at the end of the year [when it is

reversed]," he said. "It does not bring anything in terms of new business."

     At the same time, Ohoven expressed concern that Germany's EUR130 billion

pandemic packages will become a drag on future growth.

     "After the corona crisis, the gigantic mountains of debt created by the

numerous economic stimulus packages must be reduced again as quickly as

possible," he said, adding that "industrial policy interventions should only

take place when it is really necessary."

     --ECONOMIC OUTLOOK

     The German economy should shrink by 6.6% in 2020, with growth picking up in

the fourth quarter, before 10.2% expansion next year, allowing output to regain

pre-Covid levels at the end of 2021, Ohoven said. Likely deflation could also

put more pressure on the Mittelstand companies to remain competitive, he added,

though Veltmann noted that so far prices for goods such as clothes had held up

better than expected.

     "There could be deflation in some fields, such as fuel, especially if

people work from home more, but other things seem to be remaining stable," said

Veltmann, "There may also be a growing awareness that good food costs more."

     The crisis will leave a permanent mark on German industry, the officials

said, with more digitisation, and the return of some offshored production. But

funding the transition will be expensive.

     "For the Mittelstand, which has used up its all own capital to survive the

crisis and is now looking to innovate, the question is where that money comes

from," said Veltmann. "One could say that the state has a responsibility to help

because it was the state that decided the shop should close, but there are still

big questions to be answered over precisely what that looks like."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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