Debt crisis looms as government business support unwinds
By Richard Wright | 16th August 2021
Small and medium businesses are particularly vulnerable to the risks of rising debt as the economy emerges from Covid-19 restrictions.
That's according to the Bank of England's latest Financial Stability Report, which suggests that insolvencies will increase as government support unwinds.
The end of VAT and rent deferrals could be a catalyst for business distress and the reinstatement of Winding up Petitions in September is expected to be significant.
The twice-yearly reports, compiled by the Bank's Financial Policy Committee, sounded a warning about increased corporate indebtedness, in particular amongst smaller firms with weaker balance sheets.
It says: "As the economy recovers and government support unwinds as planned, some businesses may face additional pressure on their cash flow and insolvencies could increase.
"For example, businesses may face substantial repayments as VAT and rent deferrals begin to lapse, costs could increase as broader government support such as the CJRS [Coronavirus Job Retention Scheme] unwinds, and businesses that have borrowed under government support schemes will need to start making repayments on them.
"Additionally, the end of the temporary ban on winding up petitions in September 2021 is likely to lead to an increase in insolvencies over the next twelve months."
Sectors 'that are more affected by economic activity being curtailed' find themselves in particular jeopardy, the report notes.
Bank staff analysis demonstrates that as of January 2021, 11.8% of SMEs in these sectors are already in arrears on their outstanding loans or have formally defaulted
Sectors most vulnerable are Accommodation and Food, and Transport and Storage.
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