If you are able to predict that a player will encounter difficulties you can mitigate or even prevent losses before they happen. If reliance on a business is high – the famous sales or supply concentration factor – then the insolvency risk will be high too and the effect can be dramatic. It also depends on the extent to which companies and sectors rely heavily on any given organisation before it goes bust. For example, while there is market liquidity and access to credit, the impact can be less pronounced. Under normal conditions, a wide range of factors influence the severity, penetration and level of supply chain risk achieved by the insolvency domino effect. Yet, albeit gradually and orderly, it will trigger a return to a normalised number of insolvencies with two kinds of insolvencies: those of companies that were no longer viable before the crisis but were kept afloat by emergency measures, and those of companies weakened by the crisis, due to over-indebtedness or under-capitalisation.” The phasing out of state supports still depends on pandemic uncertainty. Maxime says: “It is clear that the massive state assistance from governments has ‘frozen’ the situation of many companies and led to an unprecedented and artificial fall in business insolvencies worldwide during 2020. Instead of witnessing a wave of insolvencies, state intervention has absorbed the Covid-19 shock, enabling many companies to avoid insolvency – at least for the time being. So, with the resurgence of Covid-19 infections and imposition of fresh lockdowns, why haven’t we already seen the corporate insolvency domino effect in action? The simple answer, according to Marine Bochot, Head of Group Credit Underwriting at Allianz Trade, is that “unlike any previous crisis, the massive amount of state aid pumped into the markets by developed and emerging economies prevents liquidity crisis of businesses.” How Vaccine Economics Delayed the Insolvency Domino Effect He says: “This inability to meet obligations can trigger a knock-on effect through trading networks, along the linkages between companies, sectors and countries, ultimately leading to other payment defaults and insolvencies.” Maxime Lemerle, Head of Sector and Insolvency Research at Allianz Trade, explains that such insolvencies undermine wider supply chain liquidity making the domino effect more likely. In its simplest form, this is when a company is unable to settle payments with customers and suppliers, leaving them with unpaid invoices. In essence, the insolvency domino effect is a chain reaction which starts when an insolvent company is unable to meet its obligations to its trading partners. But what exactly is the domino effect and why is it such a threat in terms of corporate insolvency risk? This could lead to global insolvencies increasing by +25% y/y in 2021, according to our latest Covid-19 report “Vaccine Economics”. This Covid-19-triggered event would impact virtually all sectors, geographies and business models.Ĭovid-sensitive sectors such as hospitality, non-food retail and transportation (especially air transport and automotive), are expected to bear the brunt of customer insolvencies. With global economic growth almost grinding to a standstill at the end of 2020, there is a global supply chains risk of widespread insolvency domino effect.
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