This article is part of our special report SME’s Access to Finance.
The worsening situation of European banks is likely to hit hardest on financial flows to small businesses which are already heavily suffering from the consequences of the crisis, policymakers and sector specialists have warned.
European Central Bank chief Jean-Claude Trichet last week warned that eurozone banks need to strengthen their balance sheets, as worries mount over the sector's exposure to Greek debt.
The Bank of China's decision to halt on foreign exchange swaps with several European banks, as well as the ECB's money market operations, were the latest signs that debt and economic woes are spreading to the financial sector.
"The European banking sector has to reinforce its balance sheet and improve its resilience," Trichet said, reinforcing fears of an impending credit crunch.
The French SME organisation, la Confédération Générale des Petites et Moyennes Entreprises, warned that at the same time the increasing instability in the banking sector threatened to dry up lines of credit to SMEs.
SMEs set for heavy punishment
In a statement the group said: "The solidity of the banking sector needs to be secure, because without that economic community, and especially SMEs, will be heavily punished as a result of the scarcity of available credit."
European banks are being squeezed not only by the euro crisis but also by tougher regulations and looming capital requirements under the Basel III regime.
Danish MEP Bendt Bendtsen, who chairs the SME circle at the European People's Party (EPP), said: "Basel's stricter capitalisation rules will not hit the big companies, the great companies such as Siemens and Carlsberg. They have access to capital because they have cash flow, and this crisis is hitting the small companies much, much worse than the big ones."
In October the ECB is due to release its latest report on the condition of access to finance for SMEs. Bendtsen said: "It is not rocket science: it has been more difficult for SMEs to get money these past six months. When I speak to my colleagues in the SME circle it is the same problem in all the member states, the banks need more capital to get them through the bad times and so it's harder for SMEs to get access to it."
Struggling to keep afloat
According to Gerhard Huemer, the director for economic and fiscal policy at the European Association of Craft, Small and Medium-sized Enterprises (UEAPME), the worsening conditions come at a critical moment since the weaker SMEs have not been able to invest in the past six months.
He said: "They will struggle to stay in the market."
Meanwhile the French have responded by creating an SME-funding mechanism via a new partnership between state-owned fund CDC Entreprises, public bank OSEO and the state's national strategic investment funds.
Described as sort of "SME super bank", the new structure aims to rationalise the various state support funding mechanisms for French SMEs, and simplify the procedures by which companies apply for the funds.
The EU is set to publish an action plan on access to funding for SMEs in December this year.
"I am a bit worried about Basel III because everyone knows that the banks need more money so the SMEs will have even more problems in getting capital," according to Danish MEP Bendt Bendtsen, who chairs the EPP's SME circle. He added: "Basel's stricter capitalisation rules will not hit the big companies, the great companies such as Siemens and Carlberg. They have access to capital because they have cash flow, and this crisis is hitting the small companies much much worse than the big ones."
"It is not rocket science: it has been more difficult for SMEs to get money these past six months. When I speak to my colleagues in the SME circle it is the same problem in all the member states, the banks need more capital to get them through the bad times and so its harder for SMEs to get access to it. In Denmark the credit lines are being pulled away from smaller companies, and that is the case throughout Europe," Bendtsen added.
"The general picture that we see at the moment is that the better companies have access to finance but the weak companies, which have just survived the crisis, have no access and therefore are unable to make any investments, and they will struggle to stay in the market," according to Gerhard Huemer, the director for economic and fiscal policy at the European Association of Craft, Small and Medium-sized Enterprises (UEAPME).
"The other point we see is a deepening division between the problem countries such as Greece, Italy, Spain, Portugal where there is no access to fresh money, and the other eurozone countries" Huemer concluded.
“Many of our members are facing cash-flow problems due to (very) late payments by their large contractors, according to Patrick Gibbels, the Brussels representative of the European Small Business Alliance. He added: “As micro-businesses sometimes run their businesses based on a handful of large clients, one late payment may cause serious problems in terms of equity. Prior to the crisis, a short term bank loan would be a solution to bridge this gap. However, getting a bank loan has become close to impossible for most small businesses. Basel III - resulting in the CRDIV directive - which tells banks to retain more liquidity, will only worsen this situation as bank loans will become more expensive or in the worst case unattainable.”
Even before the banking crisis that followed the collapse of Lehman Brothers in September 2008, experts were calling for better access to finance for SMEs in order to stimulate growth (EURACTIV 29/01/08). The problem was the subject of an EU paper as far back as 2003.
Since then, financial institutions have reined in lending, with thousands of companies going bankrupt in the absence of working capital.
The European Investment Bank has stepped up its efforts to pump liquidity into the market by earmarking €30 billion for SMEs between 2008 and 2011. The loans are channelled through commercial lenders in member states.
- Dec. 2011: European Commission (DG Enterprise) to publish new action plan on Access to Finance for SMEs.
- European Central Bank (ECB):Surveys on access to finance for SMEs