The first rumors of a new infectious disease outbreak in late December 2019 initially only drew modest attention. Soon it became clear that the world had underestimated the spreading pandemic, and, despite Austria’s distance from the region of origin in Asia, by March 2020, the spread of COVID-19 in Europe had become a focus of concern. As hospitals struggled to deal with increasing numbers of coronavirus cases, governments throughout Europe – including Austria – imposed lockdowns that brought society as we know it to an abrupt halt. Overnight, European cities became ghost towns, with shops and services shuttered. Revenues vanished and, through no fault of their own, businesses had to face a difficult financial reality.
Governments Step In
On March 20, 2020 Austria’s Minister of Finance announced that the Austrian government would save jobs and safeguard Austria’s economy, whatever the cost. A wide range of measures to safeguard Austria’s economy was introduced, including short-time work, subsidies, state-backed financings, and deferrals of tax and social security payments. Furthermore, the obligation to open insolvency proceedings was suspended, allowed only to apply to those already insolvent prior to COVID-19 or without enough liquidity to pay their debts.
Insolvencies at an All-Time Low
The efficiency of these measures will be under review for a long time. Yet one fact cannot be denied: the number of business insolvency proceedings in 2020 decreased significantly – down nearly 40 percent from both 2019 and 2018, and 56.1% from the post-financial-crisis year of 2009. Only a few insolvencies and restructurings involving large corporates have so far made headlines in Austria.
Why has the insolvency wave not yet hit Austria’s economy? It seems that the Austrian government’s deferral of tax and social security payments, together with government-backed financings and subsidies, has so far sufficiently eased the liquidity pressure on entrepreneurs. As claims did not become due, fiscal and social security authorities did not have to apply for the commencement of insolvency proceedings.
Beyond the Pandemic
Some argue that this is the calm before the storm. The Austrian economy has obviously been hit hard by the pandemic, and the government’s deferrals and subsidies clearly cannot be maintained forever in their current form. The scaling back of government support has already started. Most entrepreneurs will struggle or simply be unable to recoup lost revenues in the short- to medium-term, even after lockdown measures are finally lifted.
Exploring ways to deal with the economic effects of the pandemic will be of utmost importance. The financial crisis in 2008 has shown that long-term state-backed (re)financings are an efficient way to support and eventually save a struggling sector, such as the banking industry. As Oesterreichische Kontrollbank and its banking partners have a long track record of refinancing Austria’s economy by way of governmental guarantees, Austria is well-placed to adapt this model to deal with the economic effects of the pandemic and to provide long-term assistance to Austrian businesses.
Outside of this bank-led refinancing option, the EU-Restructuring Directive and its transposition into Austrian law may just be what the doctor ordered to deal with the aftermath of the pandemic. The EU-Restructuring Directive’s tool kit is tailored to facilitate solvent restructurings. This may be the way to fairly distribute the economic effects of the pandemic while allowing businesses to survive and save jobs.
Prospects for the Future
Quite a few areas of Austria’s economy will continue to be significantly affected by the impacts of the pandemic. It remains to be seen to what extent the Austrian government will be prepared and in a position to do to further support the economy post-COVID-19. In addition, the transposition of the EU-Restructuring Directive might well turn out to be a crucial piece of legislation in this pandemic. Only time will tell if and when a restructuring wave will sweep over the country (as well as others).
By Florian Klimscha, Partner, and Franz Tengg, Principal Associate, Freshfields Bruckhaus Deringer