Sunday

25th Feb 2018

SMEs lack support in EU financial plan

  • Will the bakery around the corner benefit from the EU's Capital Markets Union? (Photo: Richard Ella)

The European Commission said on Thursday (23 March) that it was looking into ways of making small and medium-sized enterprises' (SMEs') financial and credit information more easily available to potential lenders and investors.

The goal of this would be to make fundraising easier for SMEs on capital markets, as part of a wider plan to create a Capital Markets Union (CMU).

The CMU

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The CMU, launched in 2015, aims at developing financial tools and connecting EU markets in order to facilitate investments and boost the economy.

But, while SMEs make up the bulk of EU businesses, they are unlikely to benefit much from the plan, which the commission says is primarily aimed at them.

According to Eurostat's latest figures, 99.8 percent of the 23 million European companies have fewer than 250 employees. Among them, 93 percent employ fewer than 10 people.

The CMU will "offer new channels of access to finance for individuals and small companies that are not able to tap the traditional banking channels," said European Commission vice president Valdis Dombrovskis on Thursday.

Gerhard Huemer told EUobserver that "There is nothing bad for SMEs in the plan, but also not as much progress as one could have expected." Huemer is the economic policy director at UEAPME, the EU federation representing SMEs in Brussels.

One of the main commission proposals is to boost securitisation, which is the packaging of loans and mortgages into securities, that can be sold separately on markets.

Beneficial to SMEs?

However, the benefit of this approach to SMEs would be limited, since their loans are often too small and heterogeneous - in terms the time length or amount - to be packaged into securities.

"Even before the crisis, there was not a single SME loan portfolio that could be securitised without public support," noted Huemer.

"I am not sure that there will be a market for securitised SME loans," added Paul Tang, a Dutch left-wing MEP in charge of the securitisation file.

The EU commission itself admitted in a document published in September 2015, that "structuring an SME securitisation that is profitable for the issuer and at the same time guarantees a satisfactory return to the investor is often unfeasible."

The plan's promoters say that securitisation should enable banks to lend to more companies and SMEs, because it allows lenders to write off loans from their balance sheets. The plan for that reason starts off "with an advantage for banks," said Tang.

Frederic Hache, head of policy analysis at Finance Watch, an NGO, said that enabling banks to lend more was "the answer to a problem that might not exist."

He noted that a recent survey from the European Central Bank (ECB) showed that "finding customers remains the main concern of euro area SMEs," while access to finance was "considered the least important problem."

This suggests that SMEs are not suffering from a lack of loans, but rather from a lack of demand from EU consumers.

Small companies forgotten

The initial CMU plan included other initiatives, which mostly concerned enterprises that already have access to capital markets. That means it will probably not be of much help to many companies - like small design firms or the bakery around the corner.

"Around 2 percent of EU SMEs currently have access to capital markets. If the EU CMU plan works well, this threshold might reach 4 percent," said Huemer. "That means that there will still be 96 percent of European SMEs relying on a more traditional kind of finance, such as loans from the banks."

The small percentage of companies that can enter capital markets or attract venture capital are mostly start-ups and so-called 'unicorns' – small enterprises specialised in digital services that able to reach a high valuation in stock exchanges.

Huemer said he supported another commission proposal, presented in November, to extend the "SME supporting factor." The proposed scheme would make it easier for banks to lend to SMEs.

But he said that for more traditional companies, other measures would be more useful, such as obliging banks that reject a loan to explain their decision, or provide a list of alternative funding sources. UEAPME is currently discussing with banking federations on ways to implement these measures.

The EU commission also said on Thursday that it will work on the issue of finance and business model data, by “exploring ways of improving their availability."

Support for SMEs could also come from the ECB, according to Stanislas Jourdan from the QE for People campaign.

Quantitative easing

QE refers to quantitative easing, an ECB bond buying scheme to pump €50 billion each month into the economy.

This campaign wants the ECB to give the money directly to citizens or to spend it on public investment.

The ECB has a low rate policy to encourage more enterprises to borrow. But this cannot work "if enterprises do not want to enter into new debts," said Jourdan.

Similarly to Hache from Finance Watch, Jourdan insists that the main problem for small enterprises is finding customers - not getting new sources of financing.

"There is a common line at the ECB and the European Commission, which don't recognise that the lack of demand is the real problem," he said.

Beyond the QE for People programme, Jourdan suggests giving more attention to public investment.

The EU Commission recently proposed to extend its €315 billion investment scheme, the so-called Juncker plan. This includes a SME-specific scheme, managed by the Luxembourg-based European Investment fund (EIF).

The EIF already approved €8.5 billion worth of funding, which is supposed to trigger a total investment of €71.7 billion.

More than 403,000 SMEs across Europe are expected to benefit from the investment plan.

"This is a good thing," said Jourdan, adding his concern that "it will be no magic trick – especially because it takes time to materialise."

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Commissioner Hill has announced he wants to revive the securitisation market, saying the practice has been "stigmatised" because of the 2008 US sub-prime crisis.

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