Europe con­sid­ers pub­lic stakes in smaller com­pa­nies to stave off risk of bank­rupt­cies

▶ EU Com­mis­sion warns rise in in­sol­ven­cies could mean ef­fect of pan­demic length­ens

The National - News - - BUSINESS -

Euro­pean gov­ern­ments that fran­ti­cally as­sem­bled plans to help their economies weather the coro­n­avirus pan­demic 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 had 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 per cent 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 cash flow squeeze that could mean they fail even as oper­a­tions are re­sumed.

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. But the econ­o­mists back­ing such pro­pos­als 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 EU-wide equity plan. “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 ($811bn/Dh2.9 tril­lion) will be needed this year alone to en­sure the sur­vival of other­wise-vi­able com­pa­nies 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 €300bn 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.”

The pro­posal by Mr Krah­nen and five econ­o­mists from other uni­ver­si­ties ar­gues for a “Euro­pean Pan­demic Equity Fund” that would make an ini­tial cash in­vest­ment in re­turn for a share in fu­ture earn­ings. It would be open to com­pa­nies of all sizes, and they could ul­ti­mately buy them­selves out of the scheme at a pre-set price.

Sim­i­lar to the EU pro­posal, it would lever­age a smaller pub­lic bud­get by sell­ing bonds or take in­vest­ments from in­sti­tu­tional in­vestors such as pen­sion funds and in­sur­ers.

In the UK, the BoE ex­pects the cash-flow deficit at com­pa­nies to reach £50bn ($63bn/ Dh232bn), and Gover­nor An­drew Bai­ley has pledged to work with the govern­ment on ways to boost equity fi­nance to plug that gap.

Such plans would throw up some dilem­mas. Euro­pean Cen­tral Bank Pres­i­dent Chris­tine La­garde says the cri­sis will prob­a­bly ac­cel­er­ate pre-ex­ist­ing trends to­ward less glob­al­i­sa­tion, more dig­i­tal­i­sa­tion and greener in­dus­tries. Gov­ern­ments may feel not all parts of the econ­omy should be re­stored to their pre-virus stand­ing.

Re­searchers at the Bruegel think tank in Brus­sels wrote that any pub­licly-backed equity fund should set a “clear po­lit­i­cal di­rec­tion” with post-virus goals such as cli­mate neu­tral­ity and so­cial co­he­sion.

“I imag­ine this is very hard to do in prac­tice,” said Pa­trik-Lud­wig Hantzsch, head of eco­nomic re­search at debt col­lec­tor Cred­itre­form. “How do you want to se­lect com­pa­nies that only got in trou­ble be­cause of the cri­sis, and ide­ally be all about green tech­nolo­gies? The devil is in the details.”

Oth­ers say pub­licly backed loans that were handed out in re­cent months could be the start­ing point for equity sup­port. A pa­per writ­ten for the Peter­son In­sti­tute said that com­pa­nies could get the op­tion to con­vert debt into “equity or quasi-equity in the form of pre­ferred shares or, for pri­vately held firms, higher profit taxes”.

If that were to hap­pen in Ger­many, for ex­am­ple, where com­pa­nies have ap­plied for more than €50bn worth of loans from the state-backed devel­op­ment bank KfW, thou­sands of com­pa­nies could find that the state has joined their share­holder ros­ter.

“These loans have not been used be­fore dur­ing times of eco­nomic cri­sis – no­body knows what will hap­pen now,” said Dirk Eh­nts, a Ber­lin econ­o­mist who co-founded Pufendorf Ge­sellschaft, an NGO fo­cus­ing on po­lit­i­cal econ­omy ed­u­ca­tion.

“The Ger­man govern­ment, with­out ini­tially in­tend­ing it, could be­come a very, very big busi­ness owner.”

Of­fi­cials have pro­posed a ‘sol­vency sup­port in­stru­ment’ as part of the bloc’s recovery fund that lead­ers will de­bate

EU Com­mis­sion Vice Pres­i­dent Maros Se­f­covic ad­dresses a de­bate about EU fi­nanc­ing and eco­nomic recovery with reg­u­la­tors in Brus­sels this week

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