By Tony Barber in Brussels
Published: February 15 2010 13:38 | Last updated: February 15 2010 13:38
Rising tensions in government bond markets are impeding Europe’s economic recovery by deterring banks from lending money to companies and by raising the cost of capital, BusinessEurope, the pan-European employers’ association, has warned.
Presenting its economic forecasts for 2010 on Monday, the organisation recommended that the European Central Bank should ease pressures on capital markets by extending until at least next year the unorthodox policy under which it accepts government debt rated BBB or above in return for providing banks with central bank funds.
BusinessEurope, which represents more than 20m large, medium-sized and small companies, is concerned that banks are reluctant to lend money to businesses because they are still burdened with billions of euros in non-performing loans from the world financial crisis, and because they face tougher rules on maintaining capital reserves.
The annual growth rate of loans to Europe’s private business sector turned negative at the end of 2009, and the situation was unlikely to improve in the first half of this year, the association said.
At the same time, governments that are running ever higher budget deficits are placing huge demands on the bond markets and the space for corporate bond issues is being reduced.
“In many European Union member states, the public finances situation is very worrying. This is not only a concern for governments but for European companies, because it will influence access to capital and the cost of capital,” said Philippe de Buck, director-general of BusinessEurope.
Marc Stocker, the group’s chief economist, said financial markets were alert to the risk that the crisis in Greece’s public finances might assume dramatic proportions if the ECB were to tighten its collateral rules this year and credit ratings agencies were to downgrade Greek debt.
In such circumstances, not only would other EU governments be under intense pressure to step in with emergency financial assistance for Greece, but banks all over the EU would find themselves owning Greek debt that they would be unable to exchange for ECB funds.
According to the Bank for International Settlements, European financial institutions have $235bn worth of claims on Greek debt, most of which is thought to be in the form of government bonds.
“Banks are not able or willing to extend credit to companies right now. On the corporate bond side we see some dynamism, but the persistent tensions in the government bond markets will affect both channels,” Mr Stocker said.
“An extension until at least next year of the ECB’s collateral policy would help reduce tensions in the capital markets. It would remove an element of speculation that is currently at play – that certain government bonds won’t be eligible any more.”
BusinessEurope forecast that the 27-nation EU would achieve 1.2 per cent economic growth this year, after a slump of 4.1 per cent in 2009. It predicted a rise in the EU unemployment rate to 10.2 per cent from 8.9 per cent.
