Instead of witnessing a wave of insolvencies, our report Vaccine Economics reveals a year-on-year reduction in insolvencies thanks to state intervention. In effect, state aid has created a calm before the storm, enabling Covid-battered companies to avoid insolvency – at least for the time being.
Maxime says: “It is clear that there should have been lots of insolvencies during 2020 but that massive state assistance from governments has ‘frozen’ the situation of many companies and temporarily put a halt on businesses going bust. The phasing out of state supports should trigger 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, notably due to the excess indebtedness.”
Under normal conditions, a wide range of factors influence the severity, penetration and level of supply chain risk achieved by the insolvency domino effect. For example, while there is market liquidity and access to credit, the impact can be less pronounced.
It also depends on the extent to which companies and sectors rely heavily on any given organisation before it goes bust. 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.
Surprise is another key factor. If you are able to predict that a player will encounter difficulties you can mitigate or even prevent losses before they happen. On the other hand, if events take place at speed or on a very large scale with long supply chain or long payment terms across the chain, the corporate insolvency domino effect is potentially heightened.
The insolvency crisis surrounding UK construction company Carillion may not have been pandemic related, but it’s still a textbook example of the domino effect in action, and a warning of what may lie ahead.