After more or less successfully overcoming the COVID pandemic, Europe has a war on its doorstep. Governments are rushing to implement sanctions against Russia that aim to put an end to military combat in Ukraine as soon as possible. European companies and households are already feeling the consequences of the implemented sanctions by steep energy prices which could lead to energy poverty in the region. Simultaneously, Europe and the West are battling historical levels of inflation that central bankers thought would be transitory. Financial markets already priced higher borrowing costs in their models which resulted in a global market correction. As for the trade credit insurance markets; zombies are coming and sufficient coverage will be scarce, especially in the high-energy-consuming manufacturing and automotive sector; both powerhouses of the European economy.


After nearly two years of fighting the COVID-19 pandemic, Europeans felt that they are on the verge of victory – vaccines proved to be effective and health systems began to operate normally again. Then came February the 24th.  What the US intelligence agencies were alarming Europe for weeks became a reality – Russia invaded Ukraine again. What some thought to be a swift military operation, became a war that does not seem to have any clear objectives. Hence, its end is most likely nowhere near. As a result, Europe is in severe economic distress and facing extreme risks. Inflation is surpassing historical records; policymakers are even signalling that Europe will be facing stagflation. That being the case, companies are urging governments for aid as the latter are negotiating more harsh sanctions against Russia with depleted budgets due to the COVID-19 pandemic. What the end results of sanctions against Russia will be is not clear. It is however clear that if the EU were to implement sub-optimal policies or take any miscalculated steps, an economic crisis is inevitable.


European countries are racing to secure alternative gas supplies with the goal to become less dependent on Russian gas. The problem is of course the infrastructure. On-land gas terminal capacities are booked for years ahead. As a result, especially eastern European countries have difficulties filling in the missing supply gaps.  Additionally, oil seems to remain to hover above $100 for quite some months ahead. Increasing energy costs are pressuring production companies, transportation companies, and households as well. Higher input prices are increasing production and transportation costs along the entire supply chain, fuelling inflation across the EU. Governments are responding by lowering energy-linked taxes and introducing subsidies for companies and households. Unfortunately, such policies are more likely to prolong the crisis as the demand for energy will not change. It must be noted that according to the World Bank data, we are witnessing the largest increase in energy prices since the 1973 oil spike.

Usually, higher demand fuels supply, however, in this case, we must consider dependence on the infrastructure already in place and its limits when discussing natural gas infrastructure in Europe. Similarly, crude oil prices are highly dependent on the agreement between OPEC+ members where Russia plays a key role and has support from other members when it comes to aligning output interests.

Russia is also the largest exporter of fertilizers in the world according to The Fertilizer Institute. The European Commission paper titled Fertilisers in the EU from 2019 shows that approximately 83% of the production costs of fertilizers are energy costs. In most cases the main energy input is gas. Unless the EU does not build a resilient supply chain for fertilizers, that could lead to a reduction in their use and lower agricultural yields. Lower yields will most definitely result in higher food prices, fuelling inflation even further.

Interest rates

Central banks seemed to acknowledge that inflation is not transitory but rather permanent. Now, central bankers are racing to gain support for increasing interest rates. Such support is not in short supply. Economists have been warning central banks that inflation is a result of reckless monetary spending rather than supply chain bottlenecks. ECB, for example, will most likely end the era of negative interest rates in Q3 this year.

Raising interest rates will most definitely cool down the economy by lowering investment levels due to higher borrowing costs. Financial journals are already warning that we can expect lower activity in the field of mergers and acquisitions. Moreover, financial markets have already taken expected higher interest rate levels in their pricing models. Adjustments resulted in a significant global market correction in the past two weeks.

Trade Credit Insurance Market

When discussing rising interest rates in connection with credit risk, we must not forget about zombie companies that were on the radar of risk managers even before the COVID pandemic began. Zombie companies can be defined as companies whose operations only cover fundamental operating costs and costs of borrowing. Such companies can easily collapse if borrowing costs increase or funding is withdrawn. Taking into the calculation ongoing spikes in energy and input materials in the last two and a half years, there is most likely no shortage of zombie companies on the European market. Hopefully, such companies are not clustered at the top of the supply chains.

Trade credit insurance markets have been facing extreme downward pressure on premium rates for the past few years. The trend will most likely change with rising uncertainty, inflation, and growing demand by companies for higher credit limits. Additionally, we can expect a significant number of claims in the upcoming years as the European market will begin to cool down. Those companies that do have a trade credit insurance policy in place will have to allocate significant resources to secure existing credit limit levels – especially in the automotive sector where 2021 financial results are projected to be worrying due to supply chain disruptions in the past two years. We advise companies to source and secure trade credit insurance policies with sufficient coverage rather than signing slips with poor coverage and attractive pricing. Lastly, companies with insufficient coverage could seek commercially available niche products. However, they should be extremely diligent when implementing such solutions on their first-line insurance policies – not everything is a fit.

This article was written by the team at ALPHA CREDO