Lockdown or Knock-out? COVID-19: Are we going to play Russian roulette now?

by Michel Klompmaker

We have decided to publish a series of articles entitled “Lockdown or Knock-out?” on this platform. We will discuss and comment on the current measures taken by the various governments, economic forecasts from experts and expectations of politicians from the perspective of risk & compliance. We are just going to start and as long as there is no vaccine for the coronavirus, we will regularly discuss the issues that are worthwhile. Today we start with the recent news about lending to business customers in the Netherlands. On the one hand, we see a decrease in the number of infections and deaths, but what does this actually mean for the economy if we put it in a somewhat broader perspective? Is there reason for optimism? We would like to spread the optimistic sound, but we cannot ignore the facts and that they are not good. Did circumstances leave no other choice or have the banks and the responsible minister switched to a form of Russian roulette? ING announced yesterday that it expects to triple the number of bankruptcies in the Netherlands next year. And in the meantime, since the outbreak of the corona crisis, the Dutch banking sector has provided additional credit of around EUR 14 billion. As a result, the percentage of gross national product corporate debt (IMF source) has risen again to over 150 percent. For the critical down-to-earth reviews, who like to make dismissive statements about the financial policy of the so called “garlic countries”: Italian corporate debts are in percentage at over 60 percent of the gross national product.

Since the outbreak of the corona crisis in March last year, banks in the Netherlands have provided financial support to nearly 152,000 entrepreneurs in addition to the government’s support package. The postponement of repayments and the provision of loans or more credit space to companies now involve a total of seventeen billion euros. This is evident from the overview published last week by the Dutch Banking Association (NVB). Since the outbreak of the corona crisis, banks have provided nearly 24,000 new loans to companies, with a total value of fourteen billion euros. Almost 4,800 of these loans have been provided with a government guarantee, mainly through the Corona Small and Medium-Sized Corporations Scheme (BMKB-C). The guarantee schemes involve approximately 1.3 billion euros. To date, approximately 128,000 companies have received deferments from their banks, with a total value of three billion euros.

Chris Buijink, chairman of the Dutch Banking Association states, “Dutch society is gradually opening up again. At the same time, the economy is still in dire straits. We know that companies will struggle in a number of sectors. Just like the government, we will not be able to help everyone. We will continue to focus on companies that were healthy at the core before the corona crisis and that have a positive outlook for the future. ”

Russian roulette is characterised by an unprecedented phenomenon

Of the 152,000 entrepreneurs in the Netherlands to whom ‘financial air’ was given, virtually no company had current figures – audited by the auditor – and in many cases not yet the figures for 2019, although in many cases they do not say anything about the state of affairs in 2020. So financing was more or less blindfolded. Taking into account that the economy will not recover immediately, banks are likely to expect significant credit losses from their credit sensitive borrowers.

The scale of the coronavirus is still rising alarmingly in the world and as a result, the global economy will be adversely affected for much longer. Banks will have to take into account an exceptional scenario in their lending, in which credit can only be extended with the utmost caution to companies that already had to resort to aid during the first shock. Perhaps banks should consider a different form of lending, at least having a monthly insight into the development of the buffer capacity of the risk-sensitive borrowers.