Economic outlook and risk scenarios from Coface and Euler Hermes for 2011

Excerpted from ICBA Advantage – the newsletter for trade and credit insurance solutions, Issue 7 – Autumn 2010.

Question: In 2010 we attempt to leave the economic crisis behind us. Do you believe we are beginning a slow, long-term economic recovery in 2011, or are we looking at a double-dip scenario? What would be the impact on your ability to maintain your risk appetite?

Yves Zlotowski, Coface Group Chief Economist: We do not believe in a “double dip“ scenario. In the U.S., The Fed is ready to support growth as long as needed. Activity should nevertheless slowdown in 2011, with more cautious fiscal policies in Europe. According to our main scenario, 2011 should see a world growth of 3.5% with 1.9% for advanced economies and 6.1% for emerging markets. This scenario is favourable to stronger risk appetite. We have nevertheless to watch carefully the various bubbles that may in return lead to new episodes of crisis in the longer term. Rapid increases in stock, real estate or the credit markets in booming countries like China or Brazil bear watching.

Karine Berger, Euler Hermes Group Head – Market Management, Strategic and Economic Studies: We think that world economic recovery will continue but will remain particularly fragile and slow. Even so, since the start of 2010 Euler Hermes has increased the volume of its credit insurance exposure by almost 10%, and we are ready and have the solid capacities to continue accompanying our customers in their requirements. Our reactions during the crisis were very rapid and rigorous. Therefore, even while the economic recovery is not yet fully convincing, we are able to adopt an identical risk underwriting policy to that followed prior to the crisis. And we are able to offer significant volumes of cover where growth is now strongest, particularly in Asia.

Question: Does the economic outlook you’ve described have a greater or lesser impact on the level and structure of bankruptcies to come? Are there hotspots in the world to watch?

Karine Berger: After an increase of 30% for two years running, our Global Insolvency Index (GII) will barely decrease this year and next. The crisis has considerably rocked the industrial fabric and, particularly, the SME fabric in OECD countries. The countries of the Mediterranean basin – Greece, Portugal, Spain and, to a lesser degree, Italy – have not even really emerged from the crisis, and the number of insolvencies will continue to rise. Lastly, country risk remains particularly high in Central and Eastern Europe.

Yves Zlotowski: According to our main scenario, although uneven and subdued in many economies, the recovery will be sustained. The slowdown expected in 2011 is to be extremely limited (0.2 points of percentage of GDP) and cannot be compared to a “crisis type” growth shock. Coface has observed that a crisis occurs when the world economy loses at least two points of percentage of GDP. Therefore we expect the global trend of falling bankruptcies to continue through the rest of 2010 and 2011.

For the full Q&A article, please download ICBA Advantage – the newsletter for trade and credit insurance solutions, Issue 7 – Autumn 2010.