Rising Bankruptcies: A Cause for Concern

If you’re in search of something to be concerned about, consider the surge in bankruptcy filings. Traditionally, we witness an increase in companies resorting to bankruptcy during economic recessions, a development driven by obvious factors. Economic slowdowns typically translate to fewer buyers spending less money. Companies that overextended themselves, accumulated excessive debt, or exhibited fiscal mismanagement are often ill-equipped to withstand the unforeseen shock to their revenues and earnings.

However, what sets the current scenario apart is that we are not currently in a recession, yet bankruptcies are skyrocketing worldwide. S&P Global Market Intelligence, which closely monitors corporate health, reports that in the first half of this year, U.S. companies sought bankruptcy protection at a rate reminiscent of 2010. In England and Wales, corporate insolvencies are approaching a 14-year peak, while Germany has witnessed a nearly 50% spike in its bankruptcy rate compared to the previous year, reaching levels last seen in 2016. In Japan, the bankruptcy rate has reached a five-year high.

What’s driving this phenomenon? While labor markets and corporate profits still appear relatively robust, there are other factors challenging the resilience of companies that overextended themselves. Some firms found themselves overly leveraged and were caught off guard by the rise in interest rates. High inflation’s aftershocks affected companies lacking substantial pricing power, forcing them to sell products at gradually unprofitable prices to protect their market share.

So far, this wave of bankruptcies hasn’t engulfed many large corporations, with the notable exception of the U.S. housewares giant, Bed Bath & Beyond. However, if this trend persists—and it might if an economic recession finally materializes—it could trigger a negative cycle. Suppliers may not receive payments, workers could lose their jobs, banks may tighten lending criteria even further, and more companies could face insolvency. Numerous corporate executives are quietly hoping for a decline in interest rates to more manageable levels, as an extended period of corporate distress could be on the horizon if this doesn’t materialize.