About a quarter of companies in the Eurozone will need more government support in 2021 to avert a cash-flow crisis, according to the French credit insurance company Euler Hermes.

“The first wave of Covid-19 lockdowns caused a stronger-than-expected profitability shock for most European non-financial corporate” during the first half of 2020, with French and Spanish firms hit “particularly hard despite generous policy support,” it said.

Due to the second wave of Covid-19 related lockdowns, Euler Hermes believes that in the absence of prolonged fiscal policy support, or because of an aversion to taking on more debt, the companies most exposed to the impact of the pandemic could dry up their cash buffers. This could put around 24 percent of companies in the Eurozone, or more than 4.1 million entities, at risk of a cash-flow crisis next year.

One out of four companies in Germany and France are directly exposed to the Covid-19 sanitary restrictions compared with one out of five companies in Belgium and the Netherlands, it estimates. French corporates were much shorter on cash in the second quarter of 2020 compared to their European peers, it added. They were followed by Italian and German companies. The three countries are the largest economies in the Eurozone.

In total, the combined revenues of companies exposed to the impact of the pandemic exceed €4.3 trillion and the firms account for more than one out of four workers, notably in Spain and Italy, or close to 19 million persons, according to Euler Hermes.

It forecasts that in 2020 corporate revenues in the Eurozone could decline by 20 percent on average, while operating expenses will only decrease by 10 percent. It does not expect a recovery in the top line before late 2022, putting unprecedented strain on companies’ cash balances.

Euler Hermes also anticipates that governments will take a much more cautious approach to exiting the current lockdowns. It does not see any significant relaxation in sanitary restrictions before Easter to allow time for vaccination campaigns to have their effect and avoid a third wave of the disease. This means that the business recovery in the first half of 2021 could be slower than the one experienced in the third quarter of 2020 with the lifting of the first lockdowns.

“Hence, policy measures need to address the funding gap for companies stuck between a loss of revenue and mandatory expenses such as taxes and financial debt,” it warned, noting that governments might have to become the main creditor of companies by postponing tax payments, or even forgiving them, in order to avoid bankruptcies.