Europe’s emergency loan programs are fueling fears of a debt trap

MILAN / PARIS / MADRID (Reuters) – Michele Berteramo, owner of the Movida restaurant and cocktail bar on Milan’s Naviglio Pavese channel, was about to spend € 40,000 ($ 45,270) on renovations when the new coronavirus pandemic hit northern Italy.

FILE PHOTO: A view of the bar in the Movida restaurant on the Naviglio Pavese canal in Milan, Italy, June 5, 2020. REUTERS / Valentina Za

Instead, he burned the money to keep his business afloat during the lockdown. Movida reopened on May 18 but is struggling to keep the scales as the crowds stay away from the popular nightlife district.

“We could skip rent payments, but it can’t take forever … we’re going to need bank funding to work,” said the 46-year-old restaurateur.

Berteramo has used the Italian government guaranteed emergency loan program to pay his bills, but if he wants to continue his renovation plans he will have to take on even more debt in a shrinking economy.

Its riddle is a long-term problem for governments and banks across Europe, who are rushing to shore up troubled businesses but are concerned that increased debt will hamper their ability to invest in growth.

Lending to non-financial corporations in the euro area hit an 11-year high in April, data from the European Central Bank (ECB) shows. According to Reuters calculations, the four largest economies in the European Union and the UK saw more than € 290 billion in loans in government-supported loan programs during the ongoing coronavirus slump.

“If European Union growth returns to its pre-COVID growth rate after today’s significant shock, Europe will look to a Japan-like future,” said UBS credit strategist Stephen Caprio, describing years of stagnation in Japan as rising debt combined with a deflation that hampered the economy in the 1990s and 2000s.

“European companies have already had too much influence. This will of course stifle corporate investment. “

Underlining fears that such a scenario could become a reality, central bankers are already pointing to the dual risk of debt and deflation. “The high public and private debt in the euro area as a whole … could trigger a dangerous spiral between falling prices and aggregate demand,” said Governing Council member Ignazio Visco in a speech at the end of the year Kann.

Core debt to private non-financial corporations in the euro area represented 165% of the region’s gross domestic product (GDP) at the end of 2019, compared to 150% in the United States, according to the latest figures from the Bank for International Settlements. The European quota should rise even further after this year’s lending.

The problem is particularly acute with small and medium-sized enterprises (SMEs), which account for around two-thirds of private sector jobs in the EU from 27 nations but, unlike their larger competitors, have no direct access to capital markets.


Policy makers are discussing ways to bring more equity rather than debt into companies, but few countries have ready-made tools to channel mass investment into SMEs.

While several governments have allocated funds to inject capital into large companies, they must come up with innovative options for smaller companies.

“Aid to business needs to be diverted from first act loans to partial stakes … the decisions are complex, costly and part of the political debate,” Bank of France Governor Francois Villeroy de Galhau said in a statement in Le Figaro on on April 24th.

The European Union estimates that companies will need € 720 billion in solvency support in 2020 alone and aims to activate around € 300 billion in investment by guaranteeing and complementing private sector investments.

This could help medium-sized businesses in the longer term, although there are caveats – priority will be given to businesses that are in line with the EU’s broader goals of improving digital technology and moving towards a greener economy.

“It will be difficult to get these funds for traditional industries,” said Jose Manuel Gonzalez-Paramo, a former European Central Bank politician from Spain, adding that smaller businesses are unlikely to attract much of that money.

It’s just “when they grow, they’re on the radar. For example, you can’t imagine a fund that invests in bars, ”he told Reuters.


The French investment company Tikehau Capital, which focuses on medium-sized companies, sees opportunities.

“We’re getting more and more calls, many from 100 percent family businesses in Spain, Germany and England,” said Mathieu Chabran, co-founder of Tikehau.

“They fear their level of leverage could double, so they think it’s not such a bad idea to let in a financial investor with long-term capital now.”

Tikehau manages around $ 25.4 billion in assets – but there are a limited number of investors of this size operating in the small to medium-sized sector.

In the UK – which has one of the most developed capital markets in the region – financial lobby group CityUK estimates the equity raised by small and medium-sized businesses over the past two years at £ 7.2 billion ($ 9.00 billion). The group also predicts that £ 32 billion to £ 36 billion in loans raised by companies using the government’s emergency loan programs will be “unsustainable” by the end of the first quarter of 2021.

With support from the Bank of England, CityUK launched a “recapitalization project” to look at how private equity, insurance and pension funds could invest more in SMEs.

“This is a huge and complex challenge,” said Miles Celic, CityUK CEO. “There will be no one-size-fits-all solution. We need a number of viable options … and many different types of investors. “

She explores new types of instruments to stimulate SME investment, ranging from simple stock purchases to “participating debt” – a type of loan that is treated more like equity on the balance sheet and whose repayment would be profitable.

In France, central bank governor Villeroy said a similar tool known as ‘prets participatifs’ could be adapted to help SMEs.

Italy is planning tax breaks for both small businesses who are raising their capital and investors who offer their money to help such businesses.

Fondo Italiano d’Investimento – a fund supported by the state lender CDP – is preparing to launch an 800 million euro pot to take minority stakes in Italian companies with sales of 20 to 250 million euros.

Most of these programs and instruments require some government support – although that in itself can be a problem.

Germany has made 100 billion euros available for investments in troubled companies, but so far hardly touched it. Banks have blamed Berlin for placing onerous conditions – such as salary controls – and say it encourages companies to get into more debt instead.

With lockdowns only recently easing in much of Europe, bankers also say many businesses, especially SMEs, are unlikely to focus on raising capital just yet.

However, with the debt settlement vacation coming to an end and emergency credit availability dwindling, businesses are likely to need the option of fresh capital in late 2020 and early 2021.

“We have to start programs as soon as possible so that the funds arrive on time,” said Carlos Torres, chairman of Spain’s second largest bank, BBVA, at a conference of the country’s main business lobby last week.

“Coming too late can in many cases mean not coming”.

The Milanese restaurant owner Berteramo has used up his first government-supported loan of 25,000 euros and is waiting for a second tranche to be subscribed by the region. “We only have debts right now … I’m starting to worry,” he said.

As things stand, the only easy way to raise more equity would be to take over a business partner, which is not attractive. “The fewer people who run a restaurant, the better,” he says.

Additional coverage from Tom Sims; Letter from Rachel Armstrong; Editing by Crispian Balmer

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