Governments across Europe have undoubtedly responded strongly to the pandemic, with Eurozone countries deploying unprecedented resources to cope with the repercussions of the covid-19 crisis.
Thanks to the support provided by the ECB; governments, households and companies can take on debt at historically low rates, notwithstanding the surge in debt levels.
And as Didier Borowski, head of global views at Amundi points out, in July, the EU took a historic step forward by setting up a common debt instrument to finance the Recovery Fund.
This fund should help the most severely affected economies to catch up. And in the future, this new instrument could be used again in the event of an external shock.
Time is right for CMU
As reported in Expert Investor last week; monetary policy is no longer the only game in town, nor is fiscal policy.
The completion of the Capital Markets Union (CMU) is urgently needed to complement Europe’s economic policy toolbox.
Borowski says it is good news that Europe is on the move and that the new Action Plan on CMU adopted by the Commission at the end of September proposes an ambitious reform agenda; which is especially welcome, as the need for action has probably never been more urgent.
According to Borowski, only a better integrated capital market will enable the EU to meet the challenges that lie ahead; namely competitiveness and environmental issues and homogenisation of insolvency rules etc., which the covid-19 crisis has only exacerbated.
“The overall objective of transforming EU capital markets is to provide more financing opportunities for businesses and households. In short, it is about building a new ecosystem in which all EU countries stand to gain.”
He adds: “UK experience and the UK ecosystem can usefully guide the EU, in particular when it comes to the proposals of channelling more long-term financing to companies and infrastructure projects and to support credit availability in particular to SMEs through an improved securitisation market.”
Looking to London
And there is another UK funding initiative for SMEs that Europe could emulate.
The CityUK’s Recapitalisation Group (RCG); supported by companies including EY, Schroders, Legal & General, Citgroup Global Markets, and Lloyds Banking Group, have proposed what is called a UK Recovery Corporation.
The corporation will focus primarily on unsustainable debt but intends to supply growth funding in the future. The support is initially state-led that over time increases interest from equity investors.
Are there similar ideas within Europe?
Borowski thinks variations on the same theme are being talked over within the EU right now.
“There is a broad consensus to say that cleaning corporate balance sheets should become at some point a priority. So far, the rescue programmes have proved largely debt-based, not coordinated at the EU level, and these programmes have been varied significantly in scale.”
He adds: “Corporate debt has surged in all EU countries but not to the same extent. To overcome these inefficiencies, some academics have proposed to launch a European Pandemic Equity Fund (EPEF) to provide equity-like investments in SMEs, in exchange for a proportionate stake in the companies’ earnings.”
Share in future profits
The fund has not been set up as yet – but the proposal is being studied by the European Commission.
The outlined investment mechanism is simple and universal.
Cash is injected by the fund into SMEs in return for a share in future profits, with the possibility of a buy-out by the company.
This cash injection mechanism is thus similar to quasi-equity rather than debt, in the sense that there is no repayment but rather a return on the money invested depending on the company’s future performance level.
As Borowski explains, this fund could be financed out of the European budget, to which countries would contribute.
“The distribution of the funds to companies would be based on an examination of their recent profitability before the crisis and would be carried out in order to ensure a good diversification of risk and to generate a correct profitability.”