Speech by Thierry Philipponnat, Secretary General of Finance Watch, at the expert symposium "Financing the Green Transformation - Instruments and Coalitions for Sustainable and Social Investment in Europe", May 5th, 2014, Heinrich-Böll-Stiftung, Berlin, Germany.
In this speech, I will take a critical look at the increasingly accepted idea that, in order to stimulate investment in SMEs and infrastructure, the EU should promote a revival of securitisation and public-private partnerships.
These ideas have been raised in the context of the EC's initiative on Long-Term Financing and are becoming a consensus response to the task of restoring growth after the crisis. Finance Watch's preliminary analysis, which looks at the rationale and at some of the issues raised, points to a cautious approach to these measures.
1. What is LTF about?
In the current context of low growth, the European Commission has made it one of its main priorities to promote sustainable growth and job creation. A number of initiatives have been launched to that effect, including "Europe 2020", "Connecting Europe", and the "2030 Climate and Energy Package".
While these programs focus on the investments necessary to restore growth and competitiveness, the Long Term Financing initiative complements them and will focus on how these initiatives are financed, and more specifically on the access to financing of infrastructure and SMEs.
In this respect we understand the overarching purpose of the Long Term Financing initiative to be not so much about promoting long term over short term but rather about fostering growth, via the promotion of alternative non-bank financing channels. Incidentally the bundling in one initiative of assets with such different maturities as infrastructure and SME loans might also raise the question of what is long term.
2. Is the rationale sound?
Looking at the data, we find that the emerging narrative, which says that bank lending will have to decline due to deleveraging and therefore we need to promote capital market financing to fill the gap, is somewhat simplified:
First the current lack of growth and job creation has structural causes beyond the crisis, linked to demographics (ageing populations) and to rising inequality, the latter being a consequence of globalisation and financialisation.
Several studies have also demonstrated that when the financial sector grows beyond a certain level, more credit actually lowers growth, as it increases the probability of crashes and takes resources away from the real economy.
Therefore, while it is important to avoid a lack of credit supply after a crisis, one might question whether policy responses should be targeted only at the availability of credit, instead of addressing the more fundamental and structural issues behind the lack of aggregate demand, such as inequality.
Secondly bank lending does not have to decline: loans to NFC and households represent 28 per cent of European banks balance sheets, whereas deleveraging needs are estimated to be around 7.5 per cent. Additionally banks have several ways to deleverage, including reducing lending, but also reducing other assets, issuing new equity or retaining earnings. Therefore a decline in bank lending would be a decision by bank managers to allocate capital to more profitable activities, not an inevitable feature of the post-crisis economy.
This raises the question of why the need to change the model, and we believe that the promotion of capital market financing is a choice, as is the promotion of the investment banking model over the traditional banking model, rather than the only alternative.
3. Concerns and new risks
The push to revive securitisation in particular has to do among other reasons with increasing banks' profitability and collateral creation: One way for central banks to inject liquidity in the system in order to boost growth and fight deflation is through purchasing securities.
Securitisation being the process that transforms loans and real assets into securities, it creates additional securities that can be used as collateral when financial institutions lend to each other.
This creates three concerns in our view:
- For the purpose of growth creation, you can encourage cheap credit and in the process risk creating new bubbles, but we should not overlook more sustainable alternatives, such as attempts to address income inequalities and increase the purchasing power of the lower and middle classes. Even the Davos summit recognised the key role of inequalities in the current lack of growth, and political measures addressing it could prove to be more sustainable than repeating the cycle of credit booms and busts.
- Secondly, securities lending is a major source of bank funding, but this is a very short term procyclical type of funding that contributes to interconnectedness, a key factor of systemic risk. This type of funding is also not the kind of long term, patient, non-cyclical capital that we need.
- Lastly on the investment side, the promotion of public private partnerships raises a number of questions: While infrastructure investing is considered the 'holy grail' of economic stimulus, PPPs have a debatable track record, in terms of value for money for the user, cost to taxpayers and opacity. There is also a risk that the partial privatisation of European infrastructure might favour user-fee based projects and increase the excludability of quasi-public goods, when not all infrastructure is suitable for user-charging.
Additionally, retail investors are to be incentivised to invest in privatised infrastructure, either via retail investment funds or indirectly via their pension fund. There is a risk that the political argument that we need to provide a return to pensioners and retail investors will be to the detriment of value-for-money for users of services, and this might weaken consumer protection advocacy.
Incidentally as there is no shortage of available capital, but rather a problem of channeling all this capital to the needed investments, any initiative to promote retail savings would present a paradox, as what is needed is more consumption, not more savings. Such initiatives may have more to do with the pension reform agenda.
At the very least, it is fundamental in our view to advocate for increased transparency in public private partnerships, in order to increase the democratic accountability of projects that will commit public finances for decades to come.
4. Conclusion
In summary, we support the objective of promoting sustainable growth and job creation, provided the tools used do not create new systemic risks or undermine social outcomes. We therefore urge policymakers not to rush to embrace measures before exploring alternatives that may be more sustainable.