Payment Periods in Europe - Euler Hermes

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Euler Hermes Economic Outlook n° 1182 | Special Dossier | Payment periods ◾◾◾ From the literature on the subject and from past experience, notably during the crisis of winter 2008- 2009 and the emergence from crisis that followed, three key facts on payment periods in Europe can be noted: ▶ An economic recovery does not necessarily imply a shortening in payment periods. The crisis has generally necessitated tighter control over cash flows, with reductions in investment and optimisation of inventories. However, these have not been enough to offset the exceptional scale of the downturn, which has brought increased payment periods in every country in our study, apart from one notable exception – France, partly because of legal changes over this period. At the same time, the rise in late payments and payment defaults has also increased perceptions of a lower likelihood of being paid on time. Conversely, recovery in the economy does not automatically signify a trend of reduced payment periods. In the very short term, the recovery phase of activity can initially be accompanied by an increase in exposure (accounts receivable and payable) at a faster pace than turnover, which counters the shortening in payment periods, and it then requires the growth in activity to accelerate more than proportionally: France saw no reduction in payment periods in 2010, on annual average. Growth of 0.1%, in our study, implies a change in client payment periods of between -1.3% and +0.5%. ▶ A rise in late payments increases insolvencies more than proportionally, but the obverse is generally not shown. In 2011, in countries such as Germany and France, the downtrend in late payment periods was accompanied at the same time by a fall in insolvencies. However in Belgium and even more in The United Kingdom, this same trend failed to prevent a rise in insolvencies. In practice, a relationship between late payment periods and insolvencies is seen much more during periods of increasing late payment periods, which are propitious to a sharp rise in insolvencies. ▶ A favourable legal framework brings increased attractiveness. The European Directive will prove an effort for some countries, for instance in Southern Europe, which must gradually come into line with the new standards. However, the convergence should in the long run also allow them to generally reduce their payment risk profiles (all other things being equal), and, in so doing, increase their attractiveness as international trading partners. France regulates payment periods through its Law on the Modernisation of the Economy (LME), introduced in 2009 (see ‘Legal aspects’p. 5). The French government would like to further reduce payment periods to 30 days for SMEs and VSEs. Clearly anticipating the coming European Directive, Spain’s law of July 2010 (see ‘Legal aspects’p. 5) sets out a timetable for the gradual application of these payment periods. Focus on France The legal framework and the effect of the LME 6% 4% 2% 0 -2% -4% Introduction of the LME -6% 98 00 02 04 06 08 10 12 Growth (left axis) Client payment periods (left axis) Inverse growth in insolvencies (right axis) -20% -15% -10% -5% 0 -5% -10% -15% -20% ▶ The case of France It is notably thanks to the LME and the anticipation of its coming into force that French businesses improved payment periods and their volatility, an important point to the extent that they use four times as much inter-business credit than bank credit (at around 400 billion and 100 billion euros respectively), with accounts payable accounting for between 25% and 30% of the total balance sheet of French businesses. In 2009 payment periods fell by 3% and insolvencies rose by 12% (against +15% in 2008). 6 Source: Euler Hermes
Economic Outlook n° 1182 | Special Dossier | Payment periods Euler Hermes The aim of this study is to provide a comparative analysis between countries (our first focus point) and between sectors (second focus point) for client and for supplier payment periods in Europe. The major findings of our study are summarised below: 1The slowing of efforts seen starting in 2009 confirms the existence of three dynamics in at work in Europe. In this initial analysis, using the BACH database (a European database on non-financial firms issued by the Bank of France), we studied the course of payment periods for several European countries over the period 2000-2010 (available balance sheets). We next offer a prospective view of payment periods for 2012-2013 using Euler Hermes data, which will highlight the magnitude of the efforts that need to be made. The indicators of change and of cash flow tensions generated put the accent on the changes and the trends in payment behaviour more than on the length of payment periods, and best reflect the risks of worsening cash flows that are already under pressure. > There is a clear disparity between the countries of Northern and Southern Europe that risks widening over the very short term (2012), in the current economic environment, and this will mean greater efforts to be made, especially for countries in Southern Europe. The gaps by country. We can distinguish in fact ‘three Europes’: Germany and Poland, both of whom show payment periods shorter than the 60 days set out in the European Directive and displaying very low cash flow tension indicators; Belgium and France with payment periods close to 60 days; and Spain, Italy and Portugal, all of which saw significant increases in payment periods in 2009 and will have to make considerable efforts to meet the 60-day standard. > The outlook for 2012 is for an accentuation of the gaps between countries and therefore of the efforts to be made. In 2012, payment periods should mirror economic developments. With an outlook for positive growth, payment periods for businesses in Poland and Germany should normally shorten by an average of 2% and 0.5% respectively. For France and Belgium, with growth forecast to be below potential, payment periods will increase by 0.5%. By contrast, the countries most in difficulty, such as Spain, Italy and Portugal, should see an increase in payment periods, taking them further away from the 60-day target before 16 March. > In 2013, a general, but limited, improvement in payment periods in Europe. The outlook for positive growth in 2013 will allow an automatic improvement in payment period practices, but this will not be enough to meet the target. 2 European sectors: 4 groups. In a second analysis, we employ the Euler Hermes database for a closer examination of European business sectors, over a greater number of countries. We focus on eight key sectors. > Gaps between sectors will persist, driven by the difficult economic situation and by still unequal negotiating strengths. There is a clear gap between sectors within a given country and between countries in a given sector. The ranking of sectors (by length of payment periods) remain fairly similar from country to country. However, in Southern Europe, the sectoral differences are four to five times greater than in Northern Europe. Our eight sectors break down into four groups: (1) air transport and automobiles, with concentrated suppliers and clients who pay quickly; (2) pharmaceuticals, chemicals and automotive components, with average payment periods since they are widely present in the economy, and aeronautic component suppliers; (3) IT services, where unequal bargaining power is the rule; and (4) construction, with domestically-based suppliers and clients. ▣ ▶ Areas of analysis > For the first analysis: Countries: Germany, Belgium, Spain, France, Poland, Italy and Portugal All sizes of businesses Period: 2000-2010 > For the second analysis: Countries: Germany, Belgium, Spain, France, Italy, United Kingdom, United States, Denmark, Norway, and Sweden. All sizes of businesses Period: 2006-2010 Business sectors Sector Division NACE Code 1 Automobiles 34 34.1 to 34.3 Automotive components - 28.4 Chemicals - 4.1, 24.2, 24.3, 24.5, 24.6, 24.7 Pharmaceuticals - 24.4 Air transport 62 62.1 and 62.2 Aeronautic components - 35.3 Construction - 45.2 and 45.4 IT services 72 72.1 to 72.6 7
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Payment Periods in Europe - Euler Hermes

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