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Europe needs an SME Marshall plan

The IMF says Europe’s banks must deleverage by $4.5tr. Even if interest rates are cut or the European Central Bank pumps more liquidity into the system, credit is still going to contract severely. The European Commission needs to help SMEs by standing behind loans to this crucial sector.

If Europe is serious about boosting growth, cutting unemployment and ending the crisis, it is essential to get funding through to where it is most needed — the small and medium-sized enterprises (SMEs) that are crucial to job creation.

For this to work, the ideas need to be on a grand scale. What is needed, it could be argued, is little short of a new Marshall Plan, the assistance programme that the US put in place to drag a ravaged Europe out of the chaotic aftermath of the Second World War.

So here is one suggestion: an agency such as the European Investment Bank or European Bank for Reconstruction and Development should be mandated to insure SME loans across Europe.

Insuring such loans has a clutch of happy results. The loans would attract a lower capital charge, making them much easier for banks to hold on balance sheets.

If the loans were insured by pan-European agencies, the underlying risk and cost of debt would be roughly equal across jurisdictions. Portuguese, Italian and Spanish firms currently have to pay much more to borrow than their German peers, leaving them much more reluctant to do so — and in turn helping to make Mediterranean growth even more anaemic.

And, since writing the insurance would generate up-front returns in the form of premiums, the system could be self-funded, meaning no cost to the taxpayer and no increase in government borrowing.

The insured loans — and here’s the really neat bit — would also be perfect collateral for the covered bond market. In contrast with securitisation, which has been regulated almost out of existence, there is a wall of covered bond market cash looking for a home.

And unlike securitisation, covered bonds still enjoy preferential regulatory treatment. They are the only funding tool to have consistently navigated the minefield of pro-cyclical regulations that have stymied credit growth and exacerbated the crisis.

Now is the time to turn the tide with a system of insuring SME loans on an industrial scale, funded in the capital markets through benchmark public sector covered bonds. Unlike the recent structural experiment from Commerzbank, these would be deals that the covered bond market would overwhelmingly endorse. It’s time to recognise the potential.

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