The European Union should explore setting up an agency to pool loans to small businesses to aid their access to public bond markets as banks cut lending, according to a paper prepared by Ireland for an EU finance ministers meeting.
The proposed body could bundle loans from national support programs or make and bundle loans made directly to companies, the paper said. To aid this effort, the paper recommends establishing an EU-branded state guarantee for small- to medium-sized business loans. That would set a standard for existing national supports and make it easier to pool loans and draw cross-border investors.
An EU standard for small-business loan guarantees “would be a more effective conduit for attracting additional institutional investment into SMEs, as it would permit a pooling of risk and securitization,” according to the 49-page paper, obtained by Bloomberg News.
Ireland, holder of the rotating EU presidency for six months through June, has put the issue of non-bank funding on the agenda of the ministers meeting in Dublin on April 12 and April 13. The European Central Bank also is working on ways to boost small-business lending although it has not yet made specific proposals.
Lending to households and companies in the euro area contracted at a 0.9 percent rate in February, marking the 10th month of decline, the ECB said on March 28. The economy is in its second year of recession, forcing policy makers to search new avenues to foster economic growth.
“Given the constraints on both public finances and bank lending as result of post-crisis deleveraging, the EU recognizes the importance of proactively exploring how the effectiveness of the financial system can be improved to channel available savings towards the financing of both important and necessary infrastructure projects and also enterprises,” Irish Finance Minister Michael Noonan said in the foreword of the paper.
As much as an estimated 2 trillion euros ($2.6 trillion) investment is needed to upgrade Europe’s transport, energy, high-speed internet and telecommunications networks over the next 10 years, according to the document. Capital market funding of infrastructure projects in Europe remains underdeveloped compared to the U.S., Australia and Canada.
The document, following a workshop in Dublin in December, includes papers from Gerassimos Thomas, the Luxembourg-based director of finance issues at the European Commission, and Irish Stock Exchange Chief Executive Officer Deirdre Somers.
Ireland was forced to seek a 67.5 billion euro bailout in 2010 as the soaring cost of buttressing its debt-laden banks became too much to handle. Irish non-financial corporate lending fell 3.7 percent in February on the year-earlier period, the nation’s central bank said on March 28.
Irish taxpayers have committed a gross 64 billion euros to shoring up its banking sector amid soaring bad loan losses following the collapse of a domestic real-estate bubble.