How Resilient Are Euro Area Nfcs? A Look Into The Factors Driving Corporate Financial Risks At The Country Level

Despite recent improvement, Euro area non-financial corporations (NFCs) face tighter financing conditions than in 2022, which negatively affected their debt service capacity. At the same time, firms have accumulated liquidity buffers, due to credit support and other income support measures during the pandemic and the inflation shock, and were able to partially passthrough higher energy and commodity prices to their final output prices, despite the slowdown in economic activity. To understand whether, all taken into account, recent developments have led to higher corporate vulnerabilities in the euro area, this study uses a new composite index of corporate vulnerabilities for the Member States, based on an ECB methodology. This index serves as an instrument for an initial, high-level assessment of trends and risks across the euro area. Despite an increase in recent quarters, the vulnerability index currently remains in negative territory in most countries, indicating a low-risk scenario. Even in countries with positive index values, risks continue to be contained when compared to periods that severely tested corporate financial stability such as the great financial crisis, the sovereign debt crisis or the onset of the COVID-19 pandemic. Despite the overall increase in vulnerabilities along several dimensions, in most countries the corporate sector has remained resilient.