By Francesco Guarascio
BRUSSELS (Reuters) – Companies in the European Union sharply reduced the amount of money they raised on debt markets last year, an industry report said on Wednesday, in a sign the bloc could be heading toward a recession as firms hold off investment.
The EU economy has traditionally being over-exposed to bank loans, making it more vulnerable to banking crises than the United States, where companies are more used to tapping markets for funding via equity and bond issues.
But, despite the EU’s efforts to reduce the reliance on banks, European firms continue to largely shun public markets, a report from the Association for Financial Markets in Europe (AFME), a finance trade body, showed.
Last year, market finance accounted for 12% of EU companies’ funding, down from 14% in 2017, a disappointing outcome for the European Commission, the EU’s executive, which in 2015 launched plans for a capital market union meant to diversify firms’ financing.
The drop was caused by a 16% fall in corporate bond issuance and a 5% cut in equity issuance, AFME said, noting the drop in its market finance indicator was the largest since it started compiling it in 2012, just after the euro zone bond crisis.
“Negative changes to the indicator of this magnitude have taken place in periods associated with economic crisis and instability,” the report said, estimating this could result in a decline of 0.2 percentage points in EU growth this year.
The 28-country EU and the smaller 19-nation euro zone both saw their growth slowing to 0.2% in the second quarter of this year, while industry data and confidence indicators point to a possible further deterioration this quarter.
Companies in Britain, which is set to leave the bloc at the end of this month, have reduced their debt issuance by even more than in the EU, AFME said, pointing to Brexit uncertainty as a likely cause.
Britain remains, however, the EU’s largest market for corporate debt and equity issuance. Companies there relied on market finance for more than a quarter of their funding last year, a percentage similar to the United States, although down from 34% in 2017.
Despite the decline in market finance, overall funding to EU companies rose last year, pushed by a 7% increase in the volume of bank loans, the AFME report said, a development that runs contrary to the goal set by the EU’s finance commissioner Valdis Dombrovskis to reduce reliance on banks.
Dombrovskis, whose mandate has been renewed for other five years, said this month that strengthening the bloc’s capital market union was among its top priorities.
The AFME report also said EU savers reduced their investments in financial products last year, stashing more money in bank deposits or simply keeping it in cash.
In a more positive development, the EU confirmed its global leadership in green bonds last year and saw an increase in securitizations and other arrangements to transform bank loans into tradable financial products – instruments that if not abused can boost banks’ lending to firms and households.