What Europe's New Economy Needs
Continental Europe's capital market is maturing fast. Since the introduction of the euro, a vibrant corporate fixed-income market has developed. Witness the $9.5 billion, euro-denominated bond issue that Olivetti made in January to finance its hostile takeover of Telecom Italia. And it's not only investment-grade companies that are coming to market. The industrial restructuring following the single currency's arrival has also spurred the growth of a vibrant high-yield market.
Investors have moved increasingly into equities. Euro interest rates are rock-bottom, so private and institutional investors, most of whom traditionally bought nothing more exotic than government bonds, are eagerly buying shares to boost their yields. They have been particularly hungry for stocks in Internet companies listed on Germany's Neuer Markt, Europe's premier market for young growth companies.
The emergence of a deeper, more sophisticated, Anglo-Saxon-style capital market is to be welcomed but it could be jeopardized by recent events. Last week's sudden collapse of European Internet stock prices--down more than 35% on average--could drive some investors out of the market. Olivetti's unexpected restructuring of its finances has outraged investors, who wiped out more than $4.25 billion of its share value on Sept. 29. Meanwhile, the German media and pay-TV company Kirch Gruppe was forced on Sept 22 to delay its long-awaited high-yield issue because investors were unhappy with the proposed yield.
If there is a common thread to these three problems, it is lack of transparency. Investors complain that they weren't given enough information about Internet companies when they came to market. They argue that Olivetti should have been up front about its future financial plans at the time it made its bond issue. They say that Kirch will have to disclose more information before they'll buy its stock. That lack of transparency isn't the result of any institutional or legal problem but of poor market practice. European issuers and investment bankers will need to address this issue.