ROB LEVER, Washington | Tuesday
AMID a weakening US economy, the number of bankruptcies filed by US companies and individuals soared to a record in 2001, and experts warn that more firms could go the same way.
A total of 251 publicly held US firms filed for bankruptcy in 2001, well above the prior record of 176 in 2000, according to figures compiled by BankruptcyData.com.
And the assets of the firms ahead of the bankruptcy filing was a whopping 254 billion dollars, three times as high as any prior year, according to the figures. The biggest of those, of course, was Enron, with some $63-billion in assets.
As for personal and small business bankruptcies, the total for the first three quarters of 2001 has topped 1,1-million, and is widely expected to break the 1998 record of 1 442 549.
”We expect the yearly total to be over 1,5-million,” said Samuel Gerdano, executive director of the American Bankruptcy Institute.
Gerdano said that lawyers and others involved in bankruptcy cases ”are extraordinarily busy … this is a boom that hasn’t been seen for close to 20 years. And most people are projecting this will continue at least into 2002.”
Although the softening economy and increasing number of job cuts has led to more bankruptcy filings, Gerdano said, a key underlying cause is the high levels of debt incurred by consumers during the booming 1990s.
”People were buying bigger homes, more gadgets … much of this was financed with plastic. At some point you have to pay the bill,” he said.
Among business bankruptcies, aside from Enron, telecom and dot-com firms were among the more prominent companies seeking bankruptcy protection, analysts said.
”We’ve seen certain industries just get decimated over the past 24 months, including the telecom and technology sectors,” said Michael Baxter, a Washington lawyer specializing in bankruptcy cases.
Baxter said that unlike traditional companies filing for bankruptcy, the dot-com and telecom firms had few ”hard” assets like factories and inventory to sell to pay creditors.
”The telecom companies largely did not make any money, they projected to make money over time,” Baxter said.
”But their assets were very sensitive to technological change and became obsolete quickly … some of these firms sold for a penny on the dollar.”
Corporate defaults, which often occur at the same time as bankruptcy, soared to a record in 2001 as well, the credit rating firm Standard and Poor’s said, noting that 211 firms around the world (162 of them in the United States) defaulted on some $115,4-billion of debt last year.
”In a typical cycle, defaults peak six months after an economic bottom,” said S and P analyst Diane Vazza.
”Standard and Poor’s believes the US economy will bottom in the first quarter of this year and then improve gradually. We would expect to see continued high default rates, with defaults peaking at the beginning of the summer, when speculative-grade default rates could reach 11 percent, and then trailing off at year end.”
Bankruptcy is often seen as a way for both consumers and companies to wipe out debts and start over, and many analysts say the write-offs are not big enough to have an economic impact.
Some economists say that the growing number of bankruptcies is indicative of too much debt and that this trend will choke off economic growth.
US consumers have credit card balances averaging more than $8 000 and consumer credit has risen to $1,6-trillion, prompting concerns on how much more borrowing the US economy can absorb.
”The debt outstanding is too much to sponsor a healthy prolonged expansion at this point,” said David Littmann, senior economist at Comerica Bank. – Sapa-AFP