Debt-plagued EU firms face refinancing test

BRUSSELS – Although the global credit crunch has shown signs of easing recently, many European companies face a make-or-break year as they struggle with debt levels higher than their US competitors.

With corporate profits evaporating fast, troubles rolling over debt could threaten the very viability of some companies, putting more pressure on recession-hit European economies, economists and business leaders warned.
‘We really need to concentrate attention on this … because at some point we might lack financing and the companies stop (and go) bankrupt,’ said Ernest-Antoine Seilliere, president of the BusinessEurope employers association.
Although US households are much more heavily indebted than their European counterparts, the same cannot be said of European companies.
According to the EU’s Eurostat statistics agency, non-financial sector liabilities excluding shares and other equity stood at 128 per cent of gross domestic product in the euro area just before the credit crisis reached its worst point last fall.
US Federal Reserve data show that at the same time liabilities of non-farm, non-financial corporate US businesses excluding equity stood at 94 per cent of GDP.
‘Eurozone corporations have maintained a more robust pace of investment than their US counterparts over the last 10 years,’ said Bank of America economist Gilles Moec.
‘As a result, credit growth and debt issuance in the corporate sector has been much more dynamic in the eurozone than in the US,’ he added.
With credit markets tight, corporations are on average paying close to six percentage points more in interest on euro-denominated bonds compared to low-risk government bonds, well above the more usual one percentage point spread.
European companies face a crunch year in 2009 as they try to refinance debt accumulated during the investment boom in the face of extreme bank and investor reluctance to lend them capital.
‘The amount of corporate debt to roll over is huge in the eurozone, at a time when banks are tightening their credit standards,’ Bank of America’s Moec said.
‘So far, bank credit has continued to flow to the corporate sector. But even if supply is still there, refinancing costs for businesses are increasing. The burden for the corporate sector is increasing markedly,’ he added.
Moec said that corporations’ struggle to secure financing and avoid default could force them to make tough decisions such as cutting jobs and reducing investment, which would only worsen the economic downturn.
‘The recession will likely be prolonged because it is now the turn of the corporate sector to dramatically cut spending’ with households already tightening their belts, said Moec.
Seilliere said BusinessEurope was considering a number of proposals for EU governments to help ease financing conditions.
He said that one possibility would be for European Central Bank to buy up short-term corporate bonds as the US Federal Reserve is already doing in a bid to drive interest rates lower.
‘Obviously we envy those countries where the central bank has decided to buy commercial paper,’ he said.
However, central bank purchases of corporate bonds could have a much smaller impact in Europe than in the United States because European companies rely much more on bank lending, with only the biggest groups tapping debt markets.
‘In Europe, buying commercial paper would mean that you favour the larger enterprises over the smaller ones,’ warned economist Daniel Gros at the Centre for European Policy Studies, a Brussels-based think-tank. – Nampa-AFP