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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast,

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visit on finance.org. 
After a decade of decline, 

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bankruptcy filings around the 
world are on the rise. 

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In the United States, business 
bankruptcy filings rose more 

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than 40% last year and non 
business bankruptcy filings rose

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by 16%. 
Bankruptcies in England and 

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Wales just hit a 30 year high 
according to the latest figures.

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In Japan, corporate bankruptcies
involving a total liability of 

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¥10,000,000 or more increased 
year on year by more than 35%. 

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Germany's Federal Statistics 
Office announced that 

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bankruptcies were up over 23% 
last year and that they're 

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seeing a growing number of 
business and individual 

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applications for insolvency and 
bankruptcy. 

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Since June, monthly double digit
growth rates have been 

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consistently observed compared 
to the previous year, according 

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to the Federal Statistics 
Office. 

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In Russia, bankruptcies are 60% 
higher than a year ago, while in

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China, where we hear about all 
sorts of economic distress, the 

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bankruptcy rate is still about 
1/4 of the rate in the United 

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States. 
The reason for this is not that 

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the economy is doing better, but
that the barriers to bankruptcy 

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in China are so high that 
struggling firms have no choice 

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but to constantly refinance 
their loans, replacing old debts

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with new ones. 
The difficulties associated with

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bankruptcy in China mean that 
the situation tends to get 

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really desperate there before 
being eventually resolved. 83% 

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of the companies that end up at 
bankruptcy court in China end up

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being liquidated, compared with 
just 5% in the United States, 

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according to a recent OECD 
report. 

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Corporate bankruptcy rates in 
Norway, Finland, Spain, Britain,

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Sweden and Denmark have now 
exceeded the levels hit during 

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the global financial crisis, 
According to Eurostat. 

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Hospitality, transportation and 
professional services were the 

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hardest hit sectors, with trade,
industry and construction being 

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the least affected sectors. 
In the United States, S&P Global

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recorded 50 new corporate 
bankruptcy filings in February, 

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with healthcare being at the 
sector with the greatest number 

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of bankruptcies. 
Geographically, California and 

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Texas combined made-up nearly 
half of the month's 

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bankruptcies. 
So why is all of this happening?

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Well, financial conditions for 
businesses and households have 

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tightened significantly since 
central banks began hiking 

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interest rates in March 2022 to 
combat inflation. 

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Rates on mortgage loans, for 
instance, in the second-half of 

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last year reached their highest 
level since the start of the 

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century. 
The higher cost of debt 

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servicing, the rollback of 
pandemic support, combined with 

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higher energy costs, 
particularly in Europe, have put

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the squeeze on businesses and 
households. 

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The massive government support 
schemes rolled out globally 

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during the pandemic for both 
businesses and households, which

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are estimated to have cost $12 
trillion, meant that shaky 

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businesses were able to scrape 
by during the pandemic and only 

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began filing for bankruptcy once
government support was taken 

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away. 
Unemployment rates in most large

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economies are near their 
historic lows, and economists 

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are predicting that the global 
economy will continue to grow. 

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So do we need to worry about the
rising global bankruptcies? 

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An example of an industry that 
experienced a boom bust cycle in

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recent years is the logistics 
and trucking industry. 

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Beginning in 2020, American 
consumers, who were working from

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home and flush with stimulus 
checks and the money they were 

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saving from, no longer commuting
or taking expensive holidays, 

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started to splurge on goods. 
Webcams, office desks, computers

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and appliances overwhelmed 
ports, warehouses and shipping 

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companies. 
Online purchases exploded as 

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shoppers avoided physical 
contact at stores as consumers 

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complained about slow delivery 
times. 

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The logistics industry boomed 
due to the high demand. 

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The cost of freight went up 70% 
and the cost of running a 

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freight business fell with the 
price of diesel fuel. 

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According to The Economist, 
logistics firms hired 1,000,000 

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workers and built 1.8 billion 
square feet of new storage space

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in order to cash in on the boom.
By July 2023, the number of 

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trucks for hire in the United 
States had almost doubled. 

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When the pandemic ended, 
Americans reduced their online 

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purchases and returned to their 
old spending habits, so lavish 

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weddings and luxury pickup 
trucks. 

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As demand fell, so did freight 
prices. 

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Last summer, as the boom turned 
to bust yellow, one of America's

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biggest trucking companies, 
declared bankruptcy after 99 

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years in business. 
Joseph Shumter coined the term 

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creative destruction in 1942 to 
describe the constant industrial

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mutation that incessantly 
revolutionizes the economic 

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structure from within. 
He argued that lost jobs, 

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bankrupt companies, and 
vanishing industries are 

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inherent parts of the growth 
system and that, as unpleasant 

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as it may sound, a lot of good 
comes from all of this economic 

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turmoil. 
Creative destruction, Schumpter 

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explained, is the free markets 
messy way of moving forward and 

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delivering progress, and 
societies that allow this to 

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happen grow more productive and 
richer over time. 

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He argued that attempts to save 
jobs, industries or businesses 

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almost always go wrong. 
According to Schumpter, 

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interference to keep inefficient
businesses in place comes at a 

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high societal cost as it 
prevents the movement of capital

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and resources to new, more 
efficient industries, which can 

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lead to economic stagnation. 
Zombie firms is a term used to 

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describe companies that are 
economically unviable but 

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managed to survive either 
through bailouts or by 

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constantly raising funds from 
banks and capital markets. 

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They are Walking Dead 
businesses. 

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An EBRD paper estimates that pre
pandemic, roughly 5% of the 

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companies in their sample could 
be classified as zombie firms. 

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When the pandemic struck in 
2020, businesses found 

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themselves able to raise 
substantial amounts of external 

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financing, both by drawing down 
existing lines of credit from 

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banks and by accessing 
government support programs. 

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The EBRD analysis shows that in 
countries that introduced a 

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larger number of policy measures
to help businesses during the 

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pandemic, zombie firms saw their
borrowing grow at a faster rate 

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than healthy firms did. 
The meme stock mania during the 

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pandemic also had the effect of 
funding zombie firms that, even 

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without the pandemic, were on 
the path to bankruptcy. 

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A Goldman Sachs paper from 2022 
and an IMF paper from 2023 both 

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estimate that the number of 
zombie firms doubled to 10% by 

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the end of the pandemic. 
The IMF paper by Albuquerque and

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Iyer highlights the harm weak 
businesses on life support can 

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cause in an economy. 
These businesses reduce growth 

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and investment within an economy
by affecting the operations of 

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otherwise healthy firms, be they
direct competitors, suppliers or

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off takers. 
Government aid and low interest 

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rates during the pandemic 
delayed the bankruptcy of many 

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unviable firms. 
A big reason for the spike in 

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bankruptcies that we're seeing 
around the world today is that 

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higher interest rates and the 
withdrawal of pandemic relief 

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programs has caused zombie firms
to finally declare bankruptcy. 

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So how does bankruptcy work 
then? 

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Well, the rules are different in
different countries. 

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But in the United States, when a
business can no longer service 

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its debt or pay its creditors, 
the business itself or its 

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creditors can file with the 
federal bankruptcy court for 

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protection under either Chapter 
7 or Chapter 11. 

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In Chapter 7, the business 
seizes operations. 

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A trustee sells all of its 
assets and then distributes the 

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proceeds to its creditors. 
If anything is left over after 

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that, it's returned to the 
owners of the company. 

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This is what's known as a 
liquidation scenario. 

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Chapter 11, on the other hand, 
is known as a reorganization 

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bankruptcy, which allows a 
business to keep running while 

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creating a plan to repay its 
lenders, with the goal of 

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emerging from bankruptcy as a 
viable business. 

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In Charter 11, the original debt
provider usually remains in 

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control of the business as a 
debtor in possession and is 

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subject to the oversight of the 
court. 

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The process leads to three 
possible outcomes, 

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reorganization, conversion to 
Chapter 7, or dismissal. 

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In order to reorganize, the 
company must file and the court 

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must accept a plan of 
reorganization, which is 

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basically a compromise between 
the major stakeholders, 

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including the debtor, and its 
creditors. 

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In a Chapter 11 bankruptcy, the 
company is usually 

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recapitalized, meaning that more
money is put in by either a new 

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or existing investor who expects
to earn a return on this new 

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investment. 
The goal is that the company 

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emerges from bankruptcy as a 
viable business. 

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Chapter 11 gives a business time
to negotiate with stakeholders 

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to fix their problems and 
hopefully move on. 

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The process allows a company to 
put debt payments on hold, 

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possibly sell off parts of the 
company, and renegotiate things 

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like debt and lease commitments,
making it easier to get new 

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loans so that the business can 
keep running. 

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It involves investors and 
lenders recognizing their 

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losses, and can mean a court 
confirming a plan over the 

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objection of a class of 
creditors if necessary. 

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A combination of higher interest
rates, stubborn inflation and 

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companies dealing with huge debt
loads piled up during the easy 

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money era have resulted in one 
of the busiest periods for 

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corporate bankruptcies in quite 
some time. 

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NYU professor Edward Altman, 
who's best known for the Altman 

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Z Score popular tool for 
predicting bankruptcies, 

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recently told NPR in an 
interview that corporate zombies

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are on the rise and that he 
predicts bankruptcies will get 

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worse in 2024 when an enormous 
amount of corporate debt comes 

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due and companies are facing 
difficulties trying to refinance

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or pay off that debt. 
The reasons for rising 

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bankruptcies vary around the 
world. 

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Businesses in Europe are faced 
with the withdrawal of pandemic 

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era financial support along with
higher interest rates, just like

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in the United States. 
But they're also dealing with 

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higher energy prices due to the 
ongoing war in Ukraine. 

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Last month, the European 
Commission reduced its forecasts

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for eurozone growth in 2024 as 
high interest rates weigh on 

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economic activity, but said that
inflation is expected to have 

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from last year's highs. 
While European companies are 

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struggling to adapt to the 
bloc's tougher business 

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environment and bankruptcies are
rising, the number of new 

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business registrations have seen
their 4th consecutive quarterly 

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increase. 
Bankruptcies in Russia are up 

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60% from a year ago, according 
to Russia's Federal Register for

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bankruptcy. 
The Bank of Russia has hiked 

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interest rates to 16% to tame 
inflation, and companies that 

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need to refinance loans are 
really struggling. 

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In this environment, Russia has 
been hit hard by sanctions and 

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faces falling revenues from 
energy exports. 

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Gas prom profits have almost 
quartered since the first 

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quarter of 2022 as Europe 
slashed its imports of Russian 

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gas. 
Gazprom has tried to find new 

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energy buyers, but it's new 
deals will only compensate for 

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five to 10% of the lost European
market, according to the FT 

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Earlier this month, Putin hinted
at higher taxes for companies 

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during his State of the Nation 
address. 

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The Moscow Times reported that 
this may include a windfall tax 

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on businesses other than war 
related sectors like arms 

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production. 
The Russian economy is in rough 

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shape. 
So why is China experiencing a 

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much lower bankruptcy rate than 
the rest of the world when their

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economy appears to be slowing 
rapidly? 

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A Hong Kong court recently 
ordered the liquidation of 

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Evergrand, the world's most 
indebted property developer, 

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which has more than $300 billion
in liabilities and hundreds of 

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unfinished apartment complexes 
across China. 

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Even with this court order, it's
unclear whether mainland Chinese

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authorities will recognize the 
Hong Kong court's ruling or not.

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It's not just Evergrande, 
either. 

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Chinese developer Country 
Garden, once China's largest 

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private developer in terms of 
sales, announced last month that

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it had received a winding up 
petition from a creditor. 

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Firms like HNA and Anbang who 
had gone on debt fueled foreign 

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acquisition sprees saw their top
executives being detained. 

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You don't really want to be the 
leader of a high profile Chinese

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firm that finds itself in 
distress. 

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The Chinese government seized 
Anbang in 2018, while H and A 

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went into bankruptcy 
administration in 2021. 

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Despite all of this news, 
China's corporate bankruptcy 

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rate is still less than 1/4 of 
that seen in the United States. 

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This is surprising when the 
country is experiencing a wave 

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of corporate defaults, which 
includes half of the nation's 

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fifty largest property 
developers. 

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The reason for the low 
bankruptcy rate in China is that

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significant barriers to 
bankruptcy exist, meaning that 

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struggling firms often no choice
but to refinance on worse and 

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worse terms, replacing existing 
debts with new debts. 

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Local officials in China push 
lenders to extend the lives of 

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even the worst businesses. 
Most Chinese banks are state 

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owned or state controlled, 
meaning that the government is 

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on the hook for losses. 
A corporate bankruptcy in China 

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is extremely difficult, 
requiring the consent of courts,

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creditors, local government, and
often a regulator. 

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Personal bankruptcies in China 
are even more difficult. 

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Shenzhen is the only place in 
all of mainland China where 

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local residents can file for 
personal bankruptcy, as a pilot 

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scheme was launched there in 
March 2021. 

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According to a paper by Junfu 
and Dong. 

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These high barriers to 
bankruptcy mean that a large 

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number of enterprises exist in 
China that have not been 

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liquidated, even though they 
have gone out of business or had

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00:16:59,400 --> 00:17:04,599
their licences revoked, or are 
terminated without liquidation. 

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As Shunter explained, the 
purpose of an efficient 

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bankruptcy process is to return 
assets and resources as quickly 

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as possible to the productive 
economy, reducing the financial 

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00:17:17,760 --> 00:17:21,920
distress costs associated with 
drawn out insolvency. 

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00:17:22,400 --> 00:17:26,680
Although it may be politically 
difficult to recognise in China,

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once a borrower is unable to pay
its debts, the faster and 

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00:17:31,600 --> 00:17:35,600
orderly bankruptcy process can 
occur, the less financial 

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00:17:35,600 --> 00:17:39,120
distress costs pile up for the 
overall economy. 

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In many of the high profile 
cases, the business owners want 

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to cling on, hoping for the 
possible upside of recovery. 

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The banks don't want to book 
losses. 

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00:17:50,840 --> 00:17:54,360
And politicians want to avoid 
the embarrassment of these 

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00:17:54,360 --> 00:17:57,400
businesses announcing their 
inability to pay their 

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00:17:57,400 --> 00:18:01,480
suppliers, their employees, or 
deliver finished homes to 

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00:18:01,480 --> 00:18:04,520
customers who have already paid 
for them in full. 

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00:18:05,040 --> 00:18:09,400
Unfortunately, the longer these 
bankruptcies are postponed, the 

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00:18:09,400 --> 00:18:13,280
greater the losses will likely 
be, and the slower the economy 

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00:18:13,280 --> 00:18:17,800
will be at redeploying assets 
and resources to more productive

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00:18:17,800 --> 00:18:21,520
uses. 
So should we panic, then, about 

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00:18:21,520 --> 00:18:24,280
the rising number of 
bankruptcies around the world? 

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00:18:24,720 --> 00:18:28,560
Probably not. 
Rising bankruptcies are part of 

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00:18:28,560 --> 00:18:33,160
the business cycle and always 
occur at times of a slowdown or 

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00:18:33,160 --> 00:18:36,200
at times of great change in an 
economy. 

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00:18:36,560 --> 00:18:41,120
While bankruptcies are rising, 
many businesses also built up 

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00:18:41,120 --> 00:18:45,600
good cash buffers and secured 
cheap financing deals when rates

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00:18:45,600 --> 00:18:48,720
were low. 
As I said earlier, economists 

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00:18:48,760 --> 00:18:53,040
are forecasting that the global 
economy will continue to grow, 

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00:18:53,240 --> 00:18:56,960
and right now, unemployment 
rates in most parts of the world

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00:18:57,160 --> 00:19:01,800
are near their historical lows. 
While bankruptcies have risen, 

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00:19:02,040 --> 00:19:05,360
they're still modest by 
historical standards in big 

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00:19:05,360 --> 00:19:08,520
economies including the US and 
Europe. 

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00:19:08,960 --> 00:19:11,360
Thanks for tuning into this 
week's podcast. 

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00:19:11,600 --> 00:19:15,360
Don't forget to subscribe on 
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00:19:15,360 --> 00:19:18,840
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00:19:19,080 --> 00:19:21,720
Have a great week and talk to 
you again soon. 

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00:19:21,920 --> 00:19:24,960
Bye. 
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290
00:19:24,960 --> 00:19:27,840
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00:19:43,160 --> 00:19:43,480
Bye.