Unsustainable corporate and government debt racked up during the coronavirus pandemic is emerging as a major credit risk to the global economy and trade.

Marsh, one of the world’s biggest insurance brokers, says its annual political risk map has tracked the largest ever increases in economic risk for 2021, which is also characterised by inequality between rich and poor nations and advancing trade nationalism.

“Strains on public financing in emerging markets will result from increases in sovereign indebtedness and may create unfavourable conditions for domestic and foreign-owned businesses,” the broker says.

“Increased sovereign risk can ultimately lead to government defaults, currency crises or even an inability to convert local currency into hard currency, and to transfer such currency out of the country,” Megan Marshall, global sales leader of Marsh’s credit specialties practice, tells GTR.

“These developments would of course adversely affect the supply of trade finance and insurance, and impact importers and exporters alike.”

Many governments, particularly in North America and Europe, have undertaken vast stimulus measures in an effort to help their economies ride out a coronavirus-induced recession.

Marsh predicts that those efforts are likely to provide a short-term boost but warns “the impact may be transitory and only delay a reckoning with social inequalities, unsustainable debt, and the energy sector’s green transition”.

Some governments have leaned on trade credit programmes to prop up struggling companies through the pandemic. But a wave of company failures could be unleashed when those efforts begin to wind down and leave trade finance providers on the hook, Marsh warns.

“Extending loans and other support to keep zombie companies alive could prolong economic weakness and ultimately result in mass insolvencies,” says Marshall.

“The governments’ temporary trade credit support will eventually end. This will require investors and exporters to find longer-term solutions for credit risks. It’s advisable to begin exploring those options sooner rather than nearer the end of state-backed schemes.”

Around a quarter of the Russell 3000 index of US companies do not have enough revenue to even meet interest payments, a chief indicator of zombie company status, according to a November 2020 Bloomberg analysis. Companies that have earned the moniker include Boeing, Exxon Mobil and Delta Airlines.

Marsh is not the only insurance player to point to credit risk fears. HDI Global Speciality, a German-headquartered insurer, told GTR in December that a spike in claims due to zombie company collapses will likely be followed by increased uptake in credit risk insurance.

Gallagher, another major broker, agreed at the time that there is an expectation among underwriters that some of the worst effects of coronavirus on businesses has been delayed by government help.

Insurance costs for some sectors have jumped in response to the fears. Marshall says credit insurance markets saw only “limited” overall price rises during 2020, but in sectors battered by the pandemic, such as transport and leisure, “insurers are pushing for premium increases or changes to the programme structure which can result in a significant change in the cost of transferring the risk”.

“Insurers may remain selective in supporting mid-sized companies, and when it comes to trade with weakened economies and sectors,” she says.

Demand for export credit insurance was predicted to have increased during the first quarter of 2021, according to a February business confidence survey published by the Berne Union, a trade association for export credit and investment insurers.

It said risk appetites had grown at the end of last year, but private insurers are still showing more caution than public agencies. The organisation said its members “are expecting the consequences of Covid – in the form of emerging non-performing loans and bankruptcies – to start materialising in the coming months”.

“The general takeaway message is that risk appetites may change quickly in these uncertain times.”

Some export credit agencies (ECAs) have also foreshadowed ballooning insolvency risk when government support for businesses tapers off.

The Netherlands’ ECA, Atradius, said in a global economic report in March that it expects global insolvencies to be 26% higher in 2021 compared to 2020, with increased collapses across all regions.

It expects insolvency growth to be highest in countries such as France, Austria, Belgium, Australia and the UK.

The Australian ECA, Export Finance Australia (EFA) also says massive corporate and government borrowing is exacerbating global financial market risks. In a report last week, it similarly warned of bankruptcies and bad debt in the wake of reduced government support.

It identified France, Hong Kong, China and Russia as countries where non-financial corporate borrowing made up a large chunk of the soaring debt-to-GDP ratios during 2020.