2021 World Bank & INSOL International’s Legislative & Regulatory Group: COVID-19 response and the challenges ahead
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COVID-19 continues to present a variety of unique challenges for insolvency regulators and lawmakers worldwide. In March 2020, closing borders and widespread uncertainty underscored a crisis, prompting authorities around the world to devise and rapidly roll out measures designed to shield businesses, financial institutions and individuals against the economic effects and prevent widespread economic collapse. In Europe, for example, there were forbearance and other legal measures introduced to temporarily suspend the exercise of creditors’ rights. The challenge in this next period of the crisis is to manage uncertainty, while phasing out government support and temporary legal measures in a manner that facilitates economic recovery. These measures are captured by the joint World Bank and INSOL International Global Guide: Measure
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But many insolvency systems fall short in moving quickly to save viable businesses. This is in part because bankruptcy carries social stigma, which encourages debtors to delay recognition of financial challenges. In many countries, the absence of early warning systems, by which auditors or corporate bodies inform the directors of identified financial threats, further explains this tendency. As a result, insolvency proceedings often get started when there is nothing left to save. What could have been the reorganization of a distressed company if tackled on time ends up in a piecemeal liquidation, leaving both the debtor and its creditors dissatisfied.
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COVID-19 and corporate balance sheet vulnerabilities in emerging markets and developing economies
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The non-financial corporate (NFC) sector in emerging markets and developing economies (EMDEs) entered the pandemic with elevated financial vulnerabilities and corporate debt currently stands at record levels: the World Bank estimates that non-financial corporate debt for EMDEs stood at 39.1 percent in 2019,
1 up from 34.9 percent in 2010; the BIS estimates a much higher level of 102 percent for a group of large EMDEs
2 in 2020Q1, up from 71 percent a decade ago. Against the backdrop of a global recession that has turned out deeper than expected for most EMDEs, a prolonged period of reduced earnings induced by the COVID-19 pandemic may give way to corporate solvency problems.