Europe’s next big rescue idea: Public stakes in small firms

FRANKFURT: European governments that frantically assembled plans to help their economies weather the coronavirus lockdowns are starting to focus on a cliff edge: how to prevent cascading bankruptcies that could derail the rebound.

The next big idea gaining traction among officials and economists is potentially taking stakes in small and medium-sized businesses, in contrast to early efforts that relied heavily on loans to keep corporations afloat.

The European Commission and the Bank of England have both floated the concept, and France’s finance ministry is examining the option. So is Germany’s economy ministry, according to a spokesman. The nation’s DIHK business association, which says almost half of its members have seen their capital depleted, is supportive.

Equity support in itself isn’t new – banks were bailed out during the global financial crisis and Germany still holds a more than 15% stake in Commerzbank.

But efforts that focused on large companies triggered a backlash against authorities for ignoring struggling smaller businesses that employ the vast majority of workers.

Now, the disruptions from the pandemic mean many of those businesses face a cashflow squeeze that could see them fail even as they resume operations.

Such intervention would thrust the state into an even-deeper role in managing the economy, and would inevitably lead to accusations of picking winners and losers. The economists backing such proposals, however, say relying on yet more loans could weigh so heavily on businesses that it sucks the life out of the economy.

“There’s a risk that companies will have to ramp up debt to such an extent during the crisis that aggressive investments afterward become unlikely,” said Jan Krahnen, director of the Leibniz Institute for Financial Research SAFE in Frankfurt, and one of the authors of a proposed European Union-wide equity proposal. “This would be counteracted directly with another form of financing.”

The EU Commission identified corporate solvency as a key risk this week, warning that a rise in bankruptcies “could amplify and lengthen the pandemic shock while raising non-performing loans.”

It estimates as much as 720 billion euros (Us$811bil) will be needed this year alone to ensure the survival of otherwise-viable firms in the EU. Officials have proposed a “solvency support instrument” – as part of the bloc’s recovery fund that leaders will debate this month – which would leverage a small public budget to mobilise 300 billion euros in private equity investment.

“We’re entering a phase where corporate solvency may be shaken as national governments could start reducing the policy support put in place in the first phase of the crisis,” OECD chief economist Laurence Boone told a European Parliament hearing in June. “Where state aid has taken the form of equity injections, corporates will be more resilient.”