What could tighter COVID-19 restrictions mean for the non-performing loans market?
A tightening of rules has implications for more contact-intensive parts of the economy
- Christian Denny
Disruption to the economic recovery hasn’t gone away as the Omicron variant threatens to hinder progress made in recent months.
From the latest wave of restrictions, to the risk of rising debt-servicing levels and higher operating costs due to inflation, as well as supply chain disruption, a combination of factors could lead to a surge in corporate distress, and some corporates being more acutely affected than others.
And it’s those more contact-intensive parts of the economy, from food and hospitality to retail, travel, and aviation that remain at risk.
Already, contrasts in sectoral performance exist among these sectors, according to non-performing loans (NPLs) data from the European Banking Authority.
According to the latest JLL European NPL Market Update, NPL ratios continue to rise for the arts and entertainment, and accommodation and food services sectors, despite extensive fiscal and monetary support. Cracks are beginning to appear, financial performance is suffering, and loans are becoming under- or non-performing (i.e. the borrower is unable to repay their capital in full).
Governments and central banks are monitoring the Omicron situation closely and the unwinding of measures planned for the next few months could be postponed; the European Central Bank’s plans to taper its Quantitative Easing programme could be in doubt if restrictions across Europe are tightened further.
Relaxing of restrictions is key
An extended period of tightening restrictions could negatively impact economic growth. Meanwhile, as pandemic-related supply chain disruption continues, upward pressure on costs and inflation could mean compounded damage.
The outlook depends on the evolution of the Omicron outbreak; if cases are milder than previous coronavirus variants, measures could be relaxed as immunity builds up.
If corporate insolvency is mitigated and inflation levels are managed growth projections could be revised upward. That would mean a positive outlook for Europe’s economies in 2022 – but a fall in case numbers and the lifting of restrictions will be key.
Across Europe, there’ve so far been plenty of indicators of recovery. In the labour market, unemployment rates have dropped as firms take on workers and job vacancies hit record highs. Positive business sentiment has returned, with confidence gauges across all sectors at or above their pre-pandemic levels. Consumer confidence has rebounded too, and retail spending in most countries remains buoyant.
Though NPL sales activity is yet to accelerate, some segments of the market are starting to witness increasing levels of stress and we are beginning to see that worsening financial conditions are evident in some sectors across Europe.
Whether the damage has already been done remains unclear and the situation’s unpredictability is expected to remain for months to come.