Soaring High Since Over a Decade: German Company Collapses at Crisis Level
German businesses experiencing a surge in bankruptcy cases, reaching critical point
In a worrisome reflection of the nation's economic predicament, the number of German companies failing to meet their financial obligations has skyrocketed. This unsettling trend is backed by Creditreform Rating, who recently reported the highest default rate of German companies since 2013, reaching over a decade high in 2024. And the grim reality is that it continues to ascend.
Creditreform Rating issues an urgent call to action. The default rate for the past year stands at an alarming 1.78 percent, a figure not seen since 2013. The agency predicts an even more escalating figure, surpassing two percent in 2025. These levels were last observed during the tumultuous years of the global financial crisis in 2008 and 2009.
Payday of Reckoning: Insolvency Defined
The term "insolvency" refers to the state when companies and sole proprietors, unable to meet their financial commitments, face the imminent possibility of default. As per Creditreform Rating's "Default Study," default is marked when there's a high likelihood that an entity will falter in their obligations.
Triggering the Tsunami: Causes for the Default Rate Surge
The escalating default rate is a direct consequence of Germany's unstable economic conditions. Benjamin Mohr, Creditreform Rating's management board member, explains, "The cause of this is a potent mix of investment stagnation, structural issues within the industry, and external burdens, such as US tariffs."
Small Wonder: Size Matters
Though economists expect minimal growth in Germany this year, the respite is insufficient to halt the escalating default risks as mentioned by Mohr. The default rate is likely to persist in its upward trajectory.
This turbulence unmasks apparent disparities in the default rates between companies based on their size. Small businesses with an annual turnover of between 500,000 and 2 million euros face almost 2 percent defaults, while large corporations enjoy a significantly lower rate of 0.4 percent with revenues exceeding 250 million euros annually.
The volatile phase between two to five years post-foundation witnesses a striking default rate of 3.66 percent for young companies. The default rate for established companies, on the other hand, hovers at just over one percent after ten years in the market.
The industries most affected are transport and logistics, with a default rate of 3.37%, followed by the ailing construction sector with 2.30%. Remarkably, the chemical industry experiences the lowest default rate, well under one percent.
Germany teeters on the brink of a prolonged economic downturn, as the default crisis unfolds.
Sources:
- ntv.de
- mbo
- Refinitiv
- European Central Bank (ECB)
- International Monetary Fund (IMF)
Economic Perspective:
- Crisis Management
- Default Rates
- Economic Doldrums
Insight:
- The rise in default rates is due to escalating credit default risks, economic uncertainty, interest rate rises, and supply chain disruptions resulting from the changing trade environment.
- While the current rise in defaults mirrors specific economic challenges, the severity does not measure up to the 2008-2009 global financial crisis.
- In response to the soaring default rates, an immediate review of the community policy and employment policy is necessary to support struggling businesses and prevent unemployment.
- To mitigate the financial impact of the growing number of insolvent companies, a comprehensive business strategy that addresses investment stagnation, industry structural issues, and external burdens such as US tariffs should be implemented.
