Small EU Firms Hold Mountain Of Debt, Could Be Next Major Headache For Banks

The European Union is doing the same as they did in 2008-09, extend and pretend, dishing out cheap loans to businesses and hoping for a recovery. 

What's worrying today is that excessive optimism comes as European governments invest in the recovery by increasing public spending as the central bank keeps rates low and floods capital markets with liquidity. 

The problem is that banks have high exposure to small business loans, which is the backbone of the continent's economy. If these businesses fail, another round of economic pain is dead ahead. 

WSJ interviews Miguel Ríos, who operates four karaoke bars in Barcelona, said the pandemic and resulting government shutdown of his businesses forced him to borrow nearly $100k and put ten of his employees on a government wage-support program. He said his bars had been shuttered for almost one year as he is on the brink of financial disaster, with piles of insurmountable debt. 

"We are resisting thanks to savings and bank loans, but we can't keep like this much longer," Ríos said. 

Many small and medium-sized enterprise operators like Ríos are barely surviving through the pandemic thanks to cheap bank loans. Regional banks across the continent have loaned $2.43 trillion to them, approximately 40% of their entire loan portfolio. 

Many lenders have cleaned up their loan portfolios since the last financial crisis, but many have struggled to turn profits in a negative-rates environment.

WSJ spots a big problem for banks: the likely rise of non-performing loans for small and medium enterprises could be nearing. 

Source: WSJ 

Bank regulators fear a wave of defaults could trigger another European banking crisis, mostly since the economy is set to shrink again amid the resurgent pandemic. 

Analysts at banks including JPMorgan Chase & Co. and UBS Group AG have already downgraded the euro-area economy for the start of the year thanks to increased lockdowns and a new mutant coronavirus running rampant in the region. 

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Gary Anderson 1 month ago Contributor's comment

Credit will have to be extended even further. Small biz going out of business will hurt society in the long run.