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Capital Markets

Insolvencies: Surge of failures expected

As economic growth slows in 2006, more businesses are expected to fail, with the biggest increases likely in Germany, Japan, the UK, and the US.

Global economic growth is forecast to slow to just 2.8% in 2006 from an estimated 3.2% in 2005 and a record 4% in 2004. This will have a strong impact on the number of business failures, which, according to Euler Hermes, a specialist insurer, will rise on average by 1% and by 4% in Germany, 3% in the UK and the US, and 2% in Japan.

“What we see is that the fluctuation of the global insolvency index more or less mirrors the fluctuation of world GDP,” says Philippe Brossard, head of research at Euler Hermes. “When world GDP dipped in 2001, the world insolvency index moved up strongly. Similarly, when the world economy picked up in 2004, we saw a sharp decline in the world insolvency index. The fluctuation of the insolvencies globally is symmetric to the GDP cycle.”

In order to compare business failures in countries that have substantially different insolvency rules, Euler Hermes has devised a Global Failures Index, a weighted index that looks at the changes in reported insolvencies in different countries.

Katrina effect

The expected rise in the global index is strongly influenced by the rise in business failures in the US.

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