Our point of view

Nordic Insolvency Update

24 June 2010

Over the past few years the world economy has fallen into its deepest recession since the Second World War. This could not have gone unnoticed in the bankruptcy statistics. According to Euler Hermes, a global provider of credit insurances, the number of bankruptcies has increased so that, on a global scale, there were some 35% more bankruptcies in 2009 compared to 2008.

In many countries, such as Holland, Norway, Spain, Great-Britain, and Slovakia the increase was even greater.

In Finland and Sweden, which have been hit equally hard by the recession as other European economies, the number of bankruptcies has however remained at a more reasonable level.

In 2009, there were a total of 7,638 bankruptcies in Sweden, whereas in 2008 the total number was 6,602. Thus, the increase as compared to the year 2008 was "merely” 16%. The comparable figures in Finland were 3,275 bankruptcies in 2009 and 2,612 bankruptcies in 2008, the total increase being 25%.

What is even better is the fact that in both countries the number of bankruptcy petitions decreased in the early 2010 by 12% as compared to 2009.

These numbers are only a fraction of the top figures of the previous recession. In 1992, some 21,200 companies in Sweden and 7,400 companies in Finland went bankrupt. While in 1992, some 85 companies went bankrupt every working day of the year in Sweden, the corresponding figure in 2009 was “only” 30.

The flood of bankruptcies in Finland between 1990 and 1996 was a total of nearly 40,000 bankruptcies, in other words on average over 5,500 companies a year. This average figure is approximately 2,200 bankruptcies more than in 2009, which seems to be the peak year of the recession.

As the decrease in the gross national product during the current recession has been of about the same level as in the 1990s, it should be asked why the number of bankruptcies is only a fraction of those in the 1990s and why the number of bankruptcies in Finland and Sweden seems to fall clearly short of that in many other European economies?

One explanation must be the lessons learnt by Nordic banks from the previous recession on how many companies that went bankrupt then could, in fact, have been saved. This would have been beneficial to creditors, debtors, as well as the overall economy.

Indeed, bankruptcy is not the best solution for solving insolvency situations, but rather the worst. A significant amount of both material and immaterial value is lost in a bankruptcy, the utilization of which would be possible if the going concern situation was continued. As a result of this, the attitude of, in particular, the creditors, including the tax authorities, towards companies declared insolvent, has changed significantly. Creditors are today rather willing to negotiate and agree on changes to the payback schedules of loans as well as on any other loan terms.

This changed attitude of the Nordic financier banks is one significant explanation as to why Sweden and Finland have this time round managed to avoid a similar flood of bankruptcies as has taken place in various other European states. Another Nordic-specific explanation is the better degree of solvency and the general superiority of the credit portfolio of the Nordic banks as compared to many other European banks. This, of course, is attributable to the carefulness in granting credit, which is also a lesson of the early 1990s.

Antti Heikinheimo, antti.heikinheimo@hannessnellman.com