Capital markets have key role in EU recovery from COVID – report


© Reuters. FILE PHOTO: European Union flags flutter outside the European Commission headquarters in Brussels

By Huw Jones

LONDON (Reuters) – European Union companies must turn to capital markets in greater numbers to repair their new coronavirus-ravaged balance sheets as banks alone can’t plug the funding gap, the New Financial think tank said in a report on Friday.

The bloc has for years been trying to boost the use of capital markets and reduce the preference of smaller, family-run firms in particular for bank loans, a project made all the more urgent by Brexit and the coronavirus pandemic.

The relative underdevelopment of capital markets in the European Union compared with Britain or the United States will limit the role they can play in response to the pandemic, but they can still act as a “spare tyre” to complement bank lending, the report said.

An additional 4,000 companies in the EU could realistically raise 470 billion euros in extra funding a year by tapping markets, it said.

“While the Covid crisis has demonstrated the value of bank lending to the economy, banks will be unable to provide the necessary funding for European companies on their own,” the report said.

The Netherlands, Sweden, Denmark and France with well-developed capital markets that can lead the way, but Germany, Spain and Italy are significantly underdeveloped, it added.

Banks have provided more than 300 billion euros of new lending to EU companies and provided loan payment holidays on more than 350 billion euros during the pandemic, the report said.

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Around 800 companies have raised over 370 billion euros on capital markets, or a fifth of all external funding, during the same period.

The region’s biggest capital market, Britain, has left the bloc and will be largely locked out of the single market from January, making it harder for EU companies to access the deeper pool of liquidity in London.

The Bank of England also wants to persuade companies to raise more funds on markets, but smaller family firms are loathe to give up control to outside shareholders.

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