LONDON (BLOOMBERG) - Corporate distress in Europe's biggest markets is near a two-year high as inflation and higher interest rates squeeze indebted firms.

Companies in Germany, Britain, France, Spain and Italy are the most distressed since August 2020, according to the Weil European Distress Index. The study aggregates data from more than 3,750 listed European firms.

"If this upward trajectory continues, we would expect to see increased pressure on liquidity and further tightening across the credit markets with some businesses struggling to access finance and ultimately facing defaults," said Mr Neil Devaney, a partner and co-head of Weil, Gotshal & Manges' London restructuring practice. "The economic outlook has become significantly more challenging."

Businesses in Europe are struggling with rampant inflation, with firms forced to pay more for everything from fuel to labour. The resulting tightening of monetary policy by the Bank of England and the European Central Bank is also making it more expensive for companies to refinance.

Of the five European countries studied by Weil, Germany was the most distressed, followed closely by Britain, with companies from the retail and consumer goods sector leading the decline. To assess distress, Weil looked at metrics including companies' ability to access liquidity, changes to valuations and overall market conditions.