Commission and ECB prepare new financial mega-tool in support of SMEs

Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (on the right), gave a joint press conference on the meeting of the G20 Ministers for Finance with Mario Draghi, President of the European Central Bank (ECB). (EC Audiovisual Services).

Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (on the right), gave a joint press conference on the meeting of the G20 Ministers for Finance with Mario Draghi, President of the European Central Bank (ECB). (EC Audiovisual Services).

Yesterday the two most important institutions of the European Union, the European Commission and the European Central Bank, separately unveiled their intentions to seriously engage in an effort to create a new policy tool in support of the Union’s Small and Medium Enterprises (SMEs) and defragment Eurozone’s financial markets .The Commission issued an announcement entitled, “Improving access to finance for SMEs: key to economic recovery”, and Mario Draghi, the President of the ECB went as far as to indicate how this can be done, with concerted actions by the EU institutions. Not to forget that both the Commission and the ECB know very well that 85% of new jobs in the EU are created by the SMEs. Let’s follow the facts.

The Commission’s announcement begins with the observation that, “Small and medium-sized enterprises (SMEs) will drive the recovery in Europe, but they need improved and easy access to finance. Over the last few years the European Commission has been constantly working to improve their situation. This commitment is reiterated in a joint European Commission/European Investment Bank (EIB) Group report published today. At a time when the situation remains difficult, the EIB Group’s support for SMEs reached €13 billion in 2012…Today´s report covers the results of the current funding schemes as well as the new generation of financial instruments for SMEs. Financial resources for SMEs will be significantly enhanced through the €10 billion increase in the EIB’s capital”.

The EU’s executive says here that it has increased its financial backing of the European Investment Bank, the Union’s investment tool, in order this last institution to help SMEs through direct loans and loan guarantees. However this source of finance seems to be very limited compared to the millions of the European SMEs and the tens or hundreds of billions of euro of their financial needs. Understandably the problem is much more acute in distressed Eurozone countries, like Greece, Italy, Spain, Portugal, Ireland and elsewhere. In view of that the ECB conducted a survey which was supported by the Commission over the financial situation of the SMEs.

The conclusion was that “The recent Bank Lending Survey (BLS) confirmed weak demand for loans in the euro area. While some signs of stabilisation are emerging, the Survey on the access to finance of small and medium-sized enterprises (SMEs) in the euro area indicates continued tight credit conditions, particularly for SMEs in several euro area countries. Moreover, the available information indicates high risk perception on the part of banks”.

In plain English the financial situation of the SMEs, particularly in distressed countries is deplorable. Obviously, if there will be no action to counter this problem, the much desired recovery of Eurozone, will be postponed for a long time. The interesting thing here is the very strong willingness for action expressed by the ECB, in order to counter the difficulties of the SMEs. As the European Sting writer Maria Milouv observed this morning, “Diverging strongly from the German tradition of Bundesbank, Draghi expressed a strong interest for the countries under stress and the Small and Medium Enterprises (SMEs)”.

New scheme for the SMEs

Presumably, there is much more in Draghi’s mind than the survey about how to support not only the SMEs but the other borrowers too in distressed countries, in order to counter the inability of the peripheral lenders and financial markets to effectively support growth. Let’s see what he had to say about it. Yesterday the President of the ECB while answering a journalist’s question, went as far as to describe a new market or public system to refinance the peripheral banks, so in their turn could accord more loans the SMEs.

Of course this is what the EIB is doing today with its own restricted means. Draghi wants however this process to take a standard market outfit and mobilise hundreds not just the ten billion euros. He indicated a kind of packaging of SME’s and other loans by their lenders and sell them to some other financial institution, probably under the guarantee of the Commission or the EIB. In this manner the lenders’ liquidity will be replenished and they will continue granting new loans to SMEs.

Draghi said this is still a very initial plan and needs the support of the Commission and the EIB. By the way, Ollie Rehn, the EU commissioner responsible for finance and the euro was around, where Draghi was unveiling all that. In detail ECB’s president said that “So, you are left with buying what? SME loans, residential mortgages and mortgages to non-residents and a few other types of loans. Now, this makes the problem much more complicated, if one decides to take this way and really all the options are still very open here. By the way, let me say that our thinking is very much in a preliminary stage, given the complexity of the issue, so we have not reached any conclusion either way. But if you go this way, you want to find a way of packaging these loans in a way that they can be priced. And that is where the reference to other institutions more suited for this job of packaging and guaranteeing the loans comes in: the reference to the European Investment Bank and the reference to the European Commission itself”.

Mind you that Draghi said “our thinking”, letting to be understood that he is not alone in this in the Governing Council of the ECB, addressing indirectly the most probable to materialise German opposition. Such opposition may be centred on the fact that the packaging and the selling of the loans may need official guarantees from the Commission or the EIB. Unquestionably those guarantees may cost money, but if the revitalisation of Eurozone’s economy is successful, the guarantees will cost nothing. It’s like betting on our own abilities and future. Not to forget that presently the EFSF/ESM is fully recapitalising the Greek banks with €58 billion. In this case the new scheme would have needed much less real money.

Last but not least this is not only a policy tool to counter the present Eurozone recession. This could be a permanent answer to the standing drawback of southern countries, which stems from the expensive euro. Those countries by joining the euro area have lost their ability to balance falling competitiveness, with almost regular money devaluations. Southern Eurozone member states had been doing that for decades, before the adoption of the single money. Germany cannot deny the new Draghi scheme because its own SMEs will profit also from this new policy tool.

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