EU Floats European Equity Support for Companies Hit by Virus
EU Floats Pan-European Equity ‘Tool’ to Help Battered Companies
(Bloomberg) -- The European Commission will propose the creation of an instrument to prevent companies across the continent from going bust.
“We have provided major liquidity support to companies, but as the economy is in such a deep recession, we also need to see how we can provide a direct or rather indirect equity response,” EU Commissioner Valdis Dombrovskis said in an interview on Wednesday with Bloomberg TV. Details of the plan, due to be unveiled in the coming weeks, are still being discussed, he said.
The executive arm of the European Union is not only saddled with its biggest crisis since it’s creation, it’s also stuck with some baked-in flaws: the political and economic schism between the richer North and poor South that is complicating the cumbersome decision-making process between 27 states.
The latest proposal to dig the bloc out of a deep recession would be backed from a pool of common funds. It is a tantalizing idea though still not fully formed. The aim is to restore a level-playing field between deep-pocketed member states such as Germany that have showered their firms in state aid and the likes of debt-addled Italy that can’t match that spending power.
According to an April draft of the recovery fund plan prepared by the commission, the “solvency support instrument” would aim to mobilize 200 billion euros ($216 billion) in funds “with a focus on key value chains and restoring capital of viable companies.”
It’s not yet clear if the proposed instrument would acquire equity stakes or support the solvency of companies via subordinated debt and other liquidity support.
“We are still discussing the exact forms of participation, whether it’s direct or also indirect, basically providing some reassurances, guarantees or other ways of actually encouraging private investment in those companies,” according to Dombrovskis.
The commission warned earlier on Wednesday that the wealth gap between member states will widen, threatening the EU’s single market, and even the integrity of the bloc’s single currency. The bloc is in a delicate period, with a new and inexperienced executive and Brexit still an ongoing headache.
While all governments have been injecting cash to keep businesses and households afloat, data from the commission shows that Germany’s interventions have far outweighed anything else in Europe, where high debt has tied up public finances.
The latest forecasts put on painful display Europe’s soft underbelly of heavily-indebted members. Italy, Greece and Spain also happen to rely very heavily on summer tourism and will suffer the steepest recession this year.
That will only exacerbate an existing North-South divide.
©2020 Bloomberg L.P.