With the EU’s three-month consultation on Capital Markets Union now closed, thoughts are turning to European commissioner Jonathan Hill’s green paper on the initiative, due in September. Few initiatives in recent years have triggered such debate and carried such a weight of expectation.
“This is a generational challenge,” said Niall Bohan, head of the unit for CMU at the European Commission at a meeting in London in late May. “We are trying to select a few initiatives where the EC can deliver a decisive push to some of the bottlenecks in the system.”
Bohan is well aware that all of the initiative’s ambitions could be hard to realize. “We have to be smart about what we put in there,” he said. “[We] don’t want to aim for the absolute, to avoid us spending the next 10 years banging our heads over failure to deliver tax harmony or insolvency harmony.
“We are talking about a structural transformation of the European financial system,” Bohan continued. “Financial stability is an issue we will have to be cognizant of, but it shouldn’t be a hindrance to moving forward. [We] have to move beyond flying the European economy on one wing – that of bank finance.”
|CMU has to happen. There is no choice. Securitization has to happen in Europe, but it is a slow process to rebuild|
Pramerica Fixed Income
Access to finance is driving the CMU narrative. The most recent EY ranking of G20 countries in terms of access to finance has Germany at 14, France at 16 and Italy at 19. The UK ranks number two behind the US.
The EC is initially targeting the Prospectus Directive and the development of securitization. Consultations on these issues were taken alongside those on broader CMU and have also now closed. The EC wants to open up capital market access to SMEs by making prospectuses cheaper and easier to produce.
However, this exercise highlights what could be the Achilles heel of the whole process: the achievable initiatives may only be largely inconsequential.
“The Prospectus Directive is one that can be taken up really quickly, but I think we also all agree that we are not going to change the world and solve the problem through the Prospectus Directive by itself, although it is important,” Cora van Nieuwenhuizen, MEP for the Alliance of Liberals and Democrats for Europe, said at the ICMA AGM in Amsterdam in June. “I really think we should try to take up securitization as the next thing to work on. That is what the majority of SMEs could use as an alternative to what already exists. The Prospectus Directive is wonderful, but most of the SMEs are not going to use it anyhow.”
Dutch finance minister Jeroen Dijsselbloem emphasized the complexity of the task facing the EC at the same meeting. Banking union was “an intricate union of initiatives focused on a single goal” he said, but CMU was an intricate union of initiatives with various objectives and outcomes. “Banking union is the Beatles and CMU is jazz,” he concluded. For anyone who has listened to hours of Thelonius Monk, the prospects for CMU look bleak.
“I never thought banking union would get completed as quickly as it did, and I think some of that has spilled over to addressing some of the economic problems that Europe has,” Daniel Trinder, managing director and global head of regulatory policy at Deutsche Bank, said at the same meeting. “In some senses, we are attacking the low-hanging fruit. It is not low hanging because it is necessarily the easiest to reach; it is low hanging because of where it is in the process. So it is securitization or the prospectus directive review. With securitization, that is where you start to see the benefits most quickly, and then I think people will start to realise much more the economic benefits of it.”
In the final weeks before Hill publishes his green paper, it therefore appears that CMU’s sights are firmly trained on Europe’s stuttering securitization market. The market welcomes its rehabilitation, but there are concerns that the asset class is being asked to run before it can walk.
|Does Europe need its own |
private placement market?
“CMU has to happen,” says Greg Peters, senior portfolio manager at Pramerica Fixed Income in New York. “There is no choice. Securitization has to happen in Europe, but it is a slow process to rebuild.”
Peters joined the asset manager just over a year ago, after creating and leading Morgan Stanley’s cross-asset and asset allocation department. He gained renown in the financial crisis after warning in November 2007 that there was a greater than 50% chance that mortgage losses would cause a systemic shock that would bring the financial system to a grinding halt.
Seen it before
“This process [rebuilding ABS in Europe] might be quicker as it is being pushed as an avenue for the ECB,” he tells Euromoney. “But I worry that it might get pushed far too quickly and stuff gets packaged that shouldn’t be. We have seen this all before.”
In the meantime, Peters is ready to benefit from the lingering ABS dislocation in the region. “Structured finance is the most fundamentally cheap asset out there by a long shot,” he says. “Triple-A CLOs are completely mispriced, and I hope it stays that way.”