European businesses are increasingly anticipating a recession in the near future as bad debt losses showed a marked increase in 2018.
Companies reported 2.31% in bad debt losses in 2018 as a share of total revenues, an increase from 1.69% in 2017, according to a report from Swedish debt purchaser Intrum.
Half of European companies stated that a recession is imminent within five years, while just 30% believe no recession will occur in their country in the foreseeable future. Meanwhile 18% of companies believe that their country is already in recession.
There is a sharp divide between northern and southern Europe. In Greece and Italy, recession is largely seen as a current actuality, with 93% and 84% of businesses respectively suggesting that it was imminent. In Austria, Germany and Denmark, these figures fell below 35%.
Intrum CEO Mikael Ericson told CNBC’s “Squawk Box Europe” Tuesday that the rise in defaults from 1.69% to 2.31% in the past year was “clearly material,” adding that “the clouds are slowly building up in Europe.”
“If you look on an average in the European financial institutions, we have around 4% in the latest statistics on non-performing loans,” Ericson said.
“The equivalent number in the U.S. and Japan is around 1%, so of course there is an overhang in the European market that will probably take a number of years to come to terms with.”
A nonperforming loan (NPL) is a sum of borrowed money upon which the debtor has not made the scheduled payments for a specified period.
Daniel Lacalle, Chief Economist at Tressis Gestion, told CNBC’s “Squawk Box Europe” Tuesday that non-performing loans had not come down as quickly as expected given the current low rate environment.
“We have to remember that you have 14 countries financing themselves at negative yields at the five-year level, so on top of the risk on corporates, you have the risk on sovereigns,” said Lacalle, adding that just a 0.5% increase in debt for sovereign issuers would mean “huge changes in the economic cycle.”
The divide between northern and southern Europe is also evident in the ratio of NPLs. In the third quarter of 2018, for instance, Italy had a ratio of 9.45%, while Greece’s was 43.4% and Portugal’s 12%, according to the European Banking Authority’s December 2018 Risk Assessment Report.
The European Council in March proposed new rules to reduce existing banks’ stocks of NPLs and prevent their accumulation in the future.
“The problem is that the economy is massively intervened, and with such low rates you have that level of poor performance in terms of non-performing loans and in terms of solvency. It means that things would be a lot worse with normalized rates,” Lacalle told CNBC.