Pandemic-Induced Credit Losses Could Hit $1 Trillion, BIS Says

(Bloomberg) -- Waves of bankruptcies triggered by the coronavirus pandemic will wipe as much as $1 trillion from the value of global corporate debt markets, the Bank for International Settlements warned.

Company insolvencies “are expected to rise as measures to support credit are wound back, new consumption habits and business practices accelerate the downsizing of specific sectors,” the BIS wrote in a quarterly report published on Monday. “The looming increase in corporate bankruptcies will generate credit losses that will need to be absorbed, either by the financial system or by taxpayers.”

The somber outlook comes a year after the pandemic threw credit markets into a tailspin and constrained access to funding for essential expenses like payrolls and inventory. And while market valuations have broadly recovered, more pain lies ahead for weaker companies, according to the BIS, which is known as the central bank for central banks.

It will be an uneven blow, meanwhile. Losses in the recreation sector, which came to a standstill as governments imposed restrictions on travel and leisure to slow the spread of the virus, are projected to increase more than 8 percentage points compared to the 2018-19 period, according to the report.

Trade, transport and social services are set to experience a 1.5-3% increase in credit loss rates. Additional losses in communications, real estate and utilities will likely be negligible, however.

The geographical impact will also be uneven, with the U.K. facing the biggest increase in credit losses, followed by France and Italy, the report said.

But while the pandemic slump is especially painful for the more lockdown-sensitive sectors, aggregate loss rates are set to increase less than during the 2008 global financial crisis.

“The industries affected by the pandemic account for a relatively small share of total corporate borrowing,” the researchers wrote, and “public support measures are likely to translate into a smaller increase in credit losses than is typically the case.”

©2021 Bloomberg L.P.