Europe Charts a Different Path

The CMU has the potential to turn the tide in Europe. At present, its substantial savings are ineffectively allocated in a fragmented financial sector dominated by banks. As a result, investment, innovation, and growth are subdued.

Asset managers and financial market infrastructure companies are set to be major beneficiaries of the CMU. However, European banks can also benefit from more developed capital markets in the EU. At the retail level, a deeper equity culture could yield bigger returns for both savers and investors.

Growing momentum behind sustainable finance can help unlock the CMU’s potential, while lower-for-longer interest rates risk reinforcing the reliance of the EU economy on debt.

The EU's proposal for an unprecedented spending package to fuel the bloc's recovery from the coronavirus pandemic has been tied explicitly to green principles, although the plans are still lacking in detail and environmental groups have criticized the continued support for some fossil fuels.

The European Commission's proposal would see the EU raise €750 billion in recovery funds by issuing bonds, with €500 billion doled out to member states in grants and the rest in loans. This comes on top of €540 billion in postcrisis funding already agreed in April and a newly reinforced budget for 2021-2027 to the tune of €1.1 trillion. Combined, the funding amounts to the largest European spending plan ever proposed.

Achieving the 2050 goal would mean removing unabated fossil fuels from the EU's energy mix, and increasing demand for renewable electricity and low carbon gases, such as hydrogen.

On April 30, 2020, the European Central Bank (ECB) announced expanded measures aimed at further incentivizing banks to channel liquidity to the wider European economy. It was the latest in a series of actions since the onset of the COVID-19 pandemic aimed at containing market volatility and facilitating market liquidity. The central bank's twin-pronged approach, combining direct asset purchase programs alongside credit-easing measures aimed squarely at facilitating bank lending, has led to a surge in bond issuance and a significant increase in bank lending to corporates. However, the recovery in funding conditions has been uneven: certain primary markets, most notably high yield, are proving slow to recover, and financing costs remain elevated.

Investment-Grade Issuance Surged On Announced Support Measures From Central Banks
European Nonfinancial Issuance

^{Source: S&P Global Ratings.}

The major rating agencies are being proactive in addressing outlooks and ratings changes to account for the impact of COVID-19 on companies and economies, meaning the list of potential fallen angels is now growing.

For now though, both the sellside and buyside within the European high-yield bond segment remain sanguine about this situation, with some investors keen to pick up any new names on offer. What's more, few players appear to be concerned that a slew of fallen angels could overwhelm the market — although some analysts do warn of indigestion arising from credit downgrades in certain sectors.

There is still little certainty over the length or full impact of the coronavirus pandemic on European businesses. But as national governments battle the immediate economic challenges, massive support programs designed to preserve as much corporate liquidity as possible are being worked through.

Lenders and sponsors in the European mid-market were quick to welcome these efforts. "There has been an immediate reaction from the government in order to alleviate financial stress caused by the total lockdown of businesses, and it's hugely appreciated," one U.K.-based lender said.