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Financially vulnerable firms’ debt will increase with the pandemic crisis, although remaining below the level observed during the sovereign debt crisis

12.02.2021

Economics in a picture: Financially vulnerable firms’ debt will increase with the pandemic crisis, although remaining below the level observed during the sovereign debt crisis

 

The economic shock prompted by the COVID-19 pandemic strongly restricts Portuguese firms’ ability to generate results, contributing to an increase in their financial vulnerability. Firms may be defined as financially vulnerable when their operating results are less than twice the amount of interest expenses. 

Based on this definition, vulnerable firms’ debt is projected to increase by 9 p.p. in 2020, reaching 31% of the Portuguese firms’ total debt. For 2021 and 2022, it is projected a decline of vulnerable firms’ debt. This decline is expected to be smaller the greater the intensity and the duration of the economic shock.

The share of financial debt held by firms in vulnerability is expected to remain below the peak observed during the sovereign debt crisis. The greater resilience of Portuguese firms follows from an increase in the firms’ operating results and the reduction of interest expenses in the period preceding the pandemic crisis. The sectors of activity with the greatest increases in their vulnerability level are manufacturing, trade and accommodation and food services. 

 

For more details see Francisco Augusto and Márcio Mateus (2021), Portuguese firms’ financial vulnerability and excess debt in the context of the COVID-19 shock, published in Banco de Portugal Economic Studies (Vol. 7, N. 1).

 

Prepared by Francisco Augusto and Márcio Mateus. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

 

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