A Bad Year Ahead for Germany?

With a record number of companies already driven to insolvency in 2001 and unemployment on the rise again, analysts are forecasting another bad year for the country that long served as Europe's most powerful economic engine.

In the face of sluggish economic growth and high public debt in Germany, analysts are now predicting a further wave of insolvencies for 2003.

Germany holds dubious record

Although almost 38,000 companies are expected to close shop by the end of 2002, analysts fear that figure will be much higher next year. Creditreform, an organization specializing in debt collection and protection, forecasts that up to 42,000 companies will file for bankruptcy in 2003.

"With it, Germany will take the No. 1 place in Europe as far as insolvencies go," Michael Bretz, a spokesperson for Creditreform told DW-WORLD.

Lack of transparency a culprit

Middle-sized businesses and small companies, in particular, are expected to be the worst affected by the new insolvency wave, which is being blamed on decreasing contracts and shrinking financial resources.

"We’ve taken a nasty fall in the last few years with the stock exchange, that’s why it’s become very difficult for the small companies to get capital, also because the banks have become very cautious," Bretz explained. He urged a "turn-around in finances" among small and mid-sized companies.

But it’s not just the banks and the lack of contracts that are being blamed for the companies' misery. "Even the firms must finally get their act together and ensure more transparency," Bretz said.

For without more transparency in corporate financial reporting, credit firms are reluctant to lend more money, thus turning the process into a vicious cycle.

Companies slow to repay debts

The failure on the part of companies to pay off debts and settle bills promptly is another major cause of the current rash of bankruptcies.

Faced with a shortage of cash, many companies decide to delay payment of bills, which in turn harms other companies. More than half of the businesses in Germany are currently having financial problems, most of them due to payment delays.

"The worst hit are small and medium-sized companies with up to five employees," Dieter Plambeck, chairman of the Hamburg-based Federal Association of Debt Collection said at a press conference last month.

"They make up half of the bankruptcies. The big names -- Kirch, Babcock, Holzmann -- aren't as important as they’re made out to be in the media. But small companies die quietly and have next to no lobby."

Dramatic loss of jobs

But the problem isn't limited to businesses. Analysts are also expecting an increase in the rate of insolvencies among individuals.

Creditreform estimates that about 23,000 consumers will make their way to court to register bankruptcies by the end of this year, with the number expected to increase to 48,000 in 2003.

The consequences of the insolvency wave are dramatic: Around 590,000 jobs are expected to be lost through this year alone. Creditreform expects that figure to climb as high as 680,000 in the coming year.