European financial market separatism gathers pace
The race to develop local capital markets has kicked off as bank lending dries up and de facto capital controls inhibit the functioning of the eurozone’s single financial market. However, tighter regulation and resource constraints challenge corporate treasurers in their bid to access capital.
Look around Europe and without doubt every national government, central bank, finance ministry and financial regulator is engaged on some level with their banks, companies and investors in supporting the development of their country’s capital markets, and bond markets in particular.
The provocation for this is clear. European banks cannot lend in the volumes and at the price they once did, a reality that is strangling the primary funding channel on which many companies in Europe have historically relied. In turn, the national economies of Europe are suffering, and the eurozone economy too.
To kick-start growth, national governments et al are revisiting the workings of their local capital markets in an effort to help fill the corporate funding void created by the banking sectors retrenchment. It is a massive challenge, as the numbers illustrate.
Of total non-financial corporate debt outstanding in 2011, bank loans and other advances accounted for 85% in the euro area and the UK; with non-financial corporate bonds just 15%.
Worryingly, corporate financing needs globally are likely to be gargantuan between now and 2016 – estimated at $43 trillion to $46 trillion. The eurozone and UK will probably account for around a quarter of the total, according to Standard & Poor’s, comprising around $8.6 trillion in refinancing and $1.9 trillion to $2.3 trillion in new financing – equivalent to around 75% of EU GDP.
Funding from the bond markets, stock markets, the shadow banking sector, private equity, venture capital, family offices, insurers and pension funds are all practical and accessible alternatives, but perhaps the capital markets offer the best alternative of all.
However, while the international markets are one alternative source of funding for Europe’s diverse corporate sector, and corporate bond issuance is at record levels, for the army of small and medium-sized companies – the engine room of economic growth – international markets are not an option at this time.
Instead, many of these companies, irrespective of their nationality, are for the first time being forced to seek capital markets funding in their own backyards, raising funds from local institutional investors, who should know these companies best of all.
For an in-depth investigation into the challenges for corporate borrowers - including investors' resource constraints and tight regulation – read Euromoney's November feature on how the fragmentation of the eurozone's single financial market represents another existential threat for the single currency.
Euromoney November 2012
For more than a decade, Europe was all about the single market – and that included bonds. As bank lending dries up, that’s starting to change. After years of neglect, local capital markets across Europe are on the rise once again as national governments seek to kick-start growth and plug the yawning corporate funding gap.