European economies have benefited from an unprecedented amount of funding from capital markets to support the economic recovery after COVID-19, according to the latest research by the Association for Financial Markets in Europe (AFME).
The report analysed the impact of COVID-19 on European capital markets during the four months since the World Health Organisation declared COVID-19 a global pandemic.
The paper revealed the recovery is being led by record issuance levels of investment grade securities and environmental, social and governance (ESG) bonds.
European social, sustainable, and green bond issuance reached €55.2 billion in Q2 2020, the highest quarterly issuance volume to date.
According to AFME, the increase was driven predominantly by social bond issuance which reached a record issued amount during the quarter of €19.1 billion.
France accounted for €12.3 billion (64 percent) of total European social bond issuance, followed by the Netherlands with €2 billion, (10 percent of the European total) and Spain with €1.5 billion (8 percent of the European total).
Further key takeaways from the report revealed that European listed small to medium enterprises (SME) benefited from access to equity capital, predominantly from secondary offerings on Junior exchanges which totalled €2.7 billion between March and June of 2020.
This amount, however, continues to represent a minor portion of SME funding compared to bank lending, AFME highlighted.
In the UK, new gross bank lending to SMEs between March and May of 2020 totalled £35 billion compared to £13.7 billion in the same period of 2019
Meanwhile, the report found record volumes of bank lending with Euro area statistics showing a marked increase in net lending to non-financial corporations and in gross lending to SMEs, as underpinned by €2.6 trillion in state loan guarantees issued by European governments.
Further increases in bank balance sheets are also to be expected as corporates continue to draw down on their existing borrowing facilities and banks channel government support programmes to clients, AFME stipulated.
Elsewhere, it was highlighted that European market liquidity has deteriorated over the last few months.
AFME identified that in most asset classes bid-ask spreads are above pre-COVID levels with equity and corporate bond market bid-ask spreads respectively remaining elevated at about 30 percent and 40 percent higher than pre-crisis levels as of late June.
Government bond bid-ask spreads also continue above pre-COVID levels, particularly for Italian and French sovereign bonds. Price volatility in equity and in fixed income markets also remains elevated and above pre-COVID levels, AFME noted.
Commenting on the report, Julio Suarez, director of research at AFME, said: “During these exceptional times, European capital markets have demonstrated their ability to support economic recovery and future growth. Europe has seen a record amount of funding from capital markets instruments, predominantly fixed income securities.”
Suarez continued: “Our research also shows that Europe has the potential to lead an ESG recovery, with European social bond issuance reaching their highest quarterly volume to date. Listed SMEs across the continent have also benefited from access to equity capital and from record volumes of bank lending.”
AFME CEO Adam Farkas commented: “AFME has been working with its members and regulators across Europe to ensure that markets remain well-functioning and liquid in light of the market impact of COVID-19 while at the same time acknowledging the extraordinary support measures extended by central banks and fiscal authorities.”
“Our report shows that banks and capital markets are playing a key role in supporting the economy during this challenging period. To ensure a robust post-pandemic recovery it is important to advance the Capital Markets Union project in the EU and promote regulatory measures that improve the efficiency and functioning of European financial markets. We are keen to maintain dialogue with policy makers to ensure the industry is well placed to continue supporting European growth,” Farkas added.
