Businesses across Europe have reported vastly different experiences in their efforts to secure the financial support promised by their respective governments’ economic stimulus packages. The scale of the demand has been staggering and understandably continues to pose a unique challenge to traditional financial institutions and their usual ways of doing business.
For context France received over 450,000 enquiries for loans from SMEs and self employed professionals, Germany over 400,000 and the UK over 300,000. In the first weeks of the roll out, France’s central bank claims to have distributed 22 Billion Euros to 150 000 SMEs. In Germany, the KfV announced that 140,000 applications were processed in the first few days of the scheme. Businesses in Germany were particularly satisfied with the process, with most successful applications receiving their loans within 24 hours of approval. It is worth noting however that in both countries numerous complaints have been made as to which companies qualified for support as well as the complexity in applying, especially for businesses not used to dealing in such matters.
By contrast in the UK, fewer than 2% of SMEs initially enquiring about government backed loans had been approved in the first weeks of the scheme. In addition, there were worrying reports that some banks were hiking up interest rates on these emergency loans despite government pledges to the contrary (not to mention record low interest rates). In a bid to expand the scheme and to improve outcomes for SMEs, the UK subsequently approved a new batch of institutions including digital banks OakNorth and Starling to provide government backed loans. This certainly seems to have helped matters with applications finally starting to roll in: as of this week more than £4.1 billion worth of loans have been paid out to just over 25,000 businesses, which represents close to 50% of the applications received.
Following sustained pressure from a growing chorus of dissatisfied businesses and amid warnings that about a third of British small businesses are likely to fold in the coming weeks due to lack of liquidity, this week also finally sees the launch of 100% government backed business loans. Bounce Back Loans will cover applications of up to £50,000 which the treasury claims make up the majority of loan requests from small businesses. Despite these new measures and the progress made to date, the UK still lags its European counterparts in supporting SMEs.
From a strategic point of view it certainly feels like a glaring omission to not have included more digital banks and alternative lenders in the process sooner, especially since so many specialise in addressing an SME sector long underserved by most traditional banks. Indeed, where traditional financial institutions often have a relatively drawn out application process for SME loans, the sophistication of alternative lenders and digital banks would seem to indicate the urgency of the situation would be better addressed by them.
As their stimulus packages are rolled out however, the next major economic challenge for governments across Europe will be staving off a sovereign debt crisis. With so many ultimately risky loans being guaranteed by governments, the cost of borrowing across Europe is likely to rise as a certain proportion of businesses fail in spite of the help they receive. According to the ECB, around 16% of the eurozone GDP has been committed to government backed loans. To counter this risk the ECB and central banks across the continent are ramping up their bond purchases. The ECB alone has committed €1 trillion for this purpose, but acknowledges that it may have to drastically increase its commitment in the coming weeks in order to have the desired effect.
There have also been discussions about issuing special “corona bonds” to share the risk amongst eurozone member states and ease the burden on those economies that already have high rates of national debt such as Greece, Italy and Portugal. Unfortunately the issue has proved to be very divisive and at this stage it seems unlikely that such a solution will be implemented. Whether this changes in the coming weeks remains to be seen but the pressure to act more decisively will only grow as more countries move into recession.
