Rising insolvencies in Denmark despite recovery

As a small open economy, Denmark has understandably felt the force of the global crisis on its business environment. In 2009, GDP contracted 5.1% and private consumption shrank 4.6%, and, in January this year, unemployment shot up to 4.2%. At the same time, Danish exporters witnessed a loss of their share of a declining global market. That said, Denmark officially emerged from recession in Q3 of 2009 [with 0.4% GDP growth], and in Q4 the trend of minimal but still positive growth continued [0.2% growth]. The slow and fragile recovery continued in the first months of 2010, and job losses in the Danish manufacturing industry appear to have come to a halt. In February 2009 unemployment decreased slightly to 4.1%. Record-low interest rates and a reduction in personal taxes for many Danes are also taking effect, with private consumption finally starting to pick up pace, as consumers start to again buy cars and other consumer durables, and companies are generally more confident.

However, for many businesses, this change of sentiment has come too late. After corporate insolvencies increased 52% year-on-year in 2009, bankruptcies have not returned to their pre-crisis level, and in fact have risen again in the first two months of 2010. Seasonally adjusted figures for February 2010 show an all time high of 581 registered bankruptcies, and this figure does not take into account the large number of smaller bankruptcies, where creditors have not launched legal proceedings as there is little possibility of recovering their debts.

Blame for both the high number of bankruptcies and the minimal growth has been directed towards the banks. Many Danish banks were overexposed to the booming construction/property sector and have therefore had problems with a poor loan book. Fortunately, the banking sector received strong support from two government-aid packages: the first offering an unlimited, temporary guarantee for deposits in Danish banks, and the second giving banks the opportunity to raise subordinated loan capital from the Danish state for a period of two to three years. Despite this, a number of small and medium-sized banks have had to file for bankruptcy, and have been taken over by a state-owned special purpose vehicle to manage their dissolution.

The payment patterns of Danish companies have changed, especially in the manufacturing sector. The increased focus on liquidity has meant that quite a few large and medium-sized companies have contacted their suppliers and informed them, in so many words, that due to internal adjustments, we are now changing from 30 days credit terms to 60 days. We count on your continued co-operation and intend to make this change from next month. There seems also to be a tendency for companies that used to pay on due date to delay paying their suppliers until they receive payment from their own customers. Consequently, companies that had always in the past paid on time will now pay a week later to avoid using their own bank facility.

Still a long way to go

Denmark is paying a high price for the crisis, as the very large public surpluses of former years have suddenly turned into a public budget deficit of 3% in 2009. In 2010 this deficit could reach 6%. And, while public deficits mushroom, GDP growth for 2010 [0.9% expected by the International Monetary Fund] will remain low compared to most other EU countries. While this does not give rise to optimism, fortunately it seems that most Danish companies have done a good job of adapting their structure to the new business environment. As a result, most companies feel confident that they have emerged from the crisis in good shape. The challenge  is now to identify the companies that have not made the transition: and many companies are still in danger.

After the major rise of 52% in 2009, Crédito y Caución expects corporate insolvencies to increase 8% this year. In February 2010, the Expected Default Frequency [EDF] indicator in Denmark increased slightly to 90. This is 72 basis points lower than at its peak in March 2009, but still 70 points higher than in August 2008, before the start of the credit crisis.