The eurozone
crisis, which continues to roll on fully two years since the black
dog of sovereign debt first bared its teeth, develops so fast it
seems almost impossible to pick with any certainty a single event
as an anchor for an analysis.
Therefore, when
eurozone ministers reached a preliminary agreement on 28 June to
use a central fund to bailout struggling banks in the single
currency zone, Leasing Life took the opportunity to reach
out to the leasing community and discover how bad the crisis really
is and what the various possible outcomes might mean for the
industry.
Go deeper with GlobalData
Testament to the
ever-changing nature of the crisis and the sensitivity of the
subject for businesses, many of the leasing networks contacted by
Leasing Life refused to comment with one bank-owned lessor
suggesting the topic was too politically loaded and changing too
quickly for it to contribute.
Those brave enough to put their necks on the line offered
their views to Grant Collinson on how leasing can
survive through the eurozone’s darkest hour.
How significant is the bank bailout fund agreed by
eurozone ministers on 28-29 June in securing the future of the
zone?
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By GlobalDataAlan
Leesmith: Of negligible significance as the underlying
problems remain.
Christian
Roelofs: It signifies a continued commitment to move
forward with a solution but unfortunately still stops short of
fundamentally shoring up the whole zone as the underlying feeling
is that there are still more gaps to be closed on the balance
sheets of certain countries and their financial
institutions.
Didier
Chappet: As Jean-Luc Proutat, economist at BNP Paribas,
noted, the European summit on 28-29 June marked a major step in the
management of the eurozone debt crisis. It paves the way for the
stability fund, followed by the European stability mechanisms (EFSF
and ESM, respectively), to make direct purchases of public debt
securities within a rapid timeframe.
The European
Central Bank (ECB) will oversee these market interventions. The
summit also agreed on the principle of joint banking sector
supervision, which means the ESM should be able to recapitalise
financial institutions directly by the end of 2012. Capital
injections for ailing banks will no longer take the form of
government loans, which inconveniently increases their debt
burden.
This is a crucial point, which should help break the
vicious circle that has led to the entanglement of sovereign and
banking risks since the beginning of the crisis.
What do you
expect the effect of the bailout will be on…
Your
business?
CR: This will result in continued uncertainty and
provide opportunities for Grant Thornton to support those
businesses that are working towards a stronger and more stable
structure within their operating markets. Individual businesses may
feel in control of their own environment but definitely not
comfortable about making longer-term investment
decisions.
The European
leasing industry?
CR: Some selected leasing operations,
especially government-owned ones, may be more able to restructure
non-performing lease portfolios and divest repossessed assets with
the availability of increased funds to provision for losses.
However, independents will need to continue to work hard to
stabilise their portfolios while looking for continued sources of
goodmargin new business.
The on-going
reticence of asset funders to allocate the extra funds being pumped
into the system to actual asset funding remains a considerable
brake to the growth of the overall leasing market.
General
economic confidence?
AL: Absolutely none.
DC: Everything that can bring confidence
back into the financial market is positive. The mechanism conceived
at this summit is thus a positive signal. As well, it enables to
set up a framework for the reduction of the sovereign debt, which
is a core element for an economic upturn, and consequently, for the
leasing market’s development.
CR: In summary, while it is another
significant step in one context, namely the appetite of Germany and
the leading players to keep the region solvent, on the other hand
the suspicion that there are still large value deficits in the
balance sheets of several countries and many institutions still to
be realised means that business leaders in all sectors are not
necessarily behaving with the confidence to trade out of the
crisis.
Is the bailout
the beginning of the end of the crisis?
AL: Absolutely not, it does not even scratch
the surface
DC: The bailout, as well as a European supervision
of the banking activities is a good decision and a first step
towards the end of the crisis.
However, this
summit on its own is worthless as long as the mechanism is not
fully implemented and operational. The ESM needs to have the means
of its ambition, in order to play the role that was set out. Each
country now has to have this decision approved and implemented in
the local legislation.
This process can obviously take some time, which the
markets do not like. They could accuse the eurozone to be too slow
and take decisions too late. As a matter of fact, the European
Council has not eased tensions on the Spanish and Italian yields
(or only for a few days), proving that the crisis has still not
been solved and is more and more turning into a political
one.
What is the
solution or best possible outcome for leasing?
CR: There is no panacea to this long-running
issue, but it seems likely that the optimum solution would be to
finally see a completely transparent view of the total losses in
value across the eurozone that have yet to be revealed.
At that point the
leasing industry could assess the likely macro-economic effects and
plan accordingly as a sector once the full implications are
clearer.
What the industry
must take away from this crisis and the experience of the past five
years is that we must become truly independent and thus much less
reliant on the banking industry for our funding requirements, and
that credit policy and risk management standards must be maintained
especially during the good times when defaults are low and volumes
are high.
These will allow us
to be more in control of our own destiny during the ups and downs
in the future.
AL: Any solution less than a full transfer
of fiscal control to a central body can only be a temporary
solution and sooner or later
the problem will return to haunt the euro countries; the current
concept of the euro can only be doomed to failure, so
something must give – either full fiscal unity or break
up.
DC: We need a realistic, secured and
common vision of the European growth.
How do you
think the following scenarios could affect the European leasing
industry?
A Greek exit
from the eurozone
AL: Any impact on the leasing industry will
be a result of any impact on the European
economy, generally. A Greek exit before the end of 2013 is highly
likely. Such a time delay allows time for planning to minimise as
much as possible some of the consequences. In the long term it
would be a small step towards solving a much larger problem, so in
the long term the European economy will benefit
A Greek, Spanish and Italian
exit
AL: With a Greek exit likely, the
likelihood of a Spanish exit increases to a 50/50 possibility. An
Italian exit is less likely, but remains a possibility.
CR: First, any exit is likely to crystallise
huge losses for lenders without the euro to peg their exposures
against. Secondly, it would be likely to adversely affect leasing
demand for as long as it would take to determine if the eurozone
could survive, and in what format, especially for multi-national
businesses with large leasing requirements who would be highly
likely to batten down the hatches and freeze all leasing/borrowing
decisions.
The industry would
be forced to undertake a grass roots review of its whole European
operating model, given that the biggest players operate across the
whole zone and would have not only the economic impact of these
withdrawals to swallow but the real spectre that the entire market
would contract over say at least a two-year period. In the
short-term, foreign exchange exposures and managing realistic
portfolio and asset valuations would potentially be the largest
headache faced by the pan-European operators where any country
exited the eurozone.
A eurozone with centralised tax, budgetary and
regulatory powers
AL: This might be what is needed, but it is
unlikely to happen. For this to happen it would need elected
parliaments in each country to be prepared to transfer even more
powers to an unelected and unaccountable body in Brussels. This is
exactly what is being challenged currently in the German Federal
Constitutional Court; does the Bundestag have authority to transfer
some of its constitutional powers to Brussels without consulting
the people?
It all boils down
to whether in a democracy it is permissible for lawmakers to divest
themselves of the responsibilities the constitution gives them.
Even if the German courts rule in favour, how likely is it that,
sooner or later, the people in the eurozone countries will say
enough is enough?
A two-tier eurozone
AL: A two -tier eurozone is not a
solution. Even if a small group of the original countries manage to
reach agreement on transfer of sovereignty, all others would return
to national currencies. There is no alternative – one is either
fully in or fully out.
CR: As we have already seen, losses have an
impact on capital adequacy and this forces institutions to closely
review their usage of capital. This may cause further disruption to
the leasing market if the leasing subsidiaries are seen as non-core
and lose support from the parent.
On the flip-side
the weaker economies run the risk of becoming dead-zones with
little opportunity to write new leasing business and an even higher
rate of defaults on existing leases with assets being disposed of
into further depressed markets. There would also be a clear push to
domestic lessors with domestic funding and away from multi-national
companies with a central treasury.
A very difficult
situation all round in which there would be massive movements in
assets plus likely rationalisation as the stronger players who have
less exposure to the weaker southern and eastern European countries
are able to consolidate in the “home” markets of themselves and
their over exposed competitors.
The overall market
would reduce but basic economics would eventually settle the
volume/margin formula back into equilibrium. This opens up the
likelihood of acquisition and new entrants to a market which will
eventually grow again as pent-up demand is released.
The end of the eurozone
DC: I do not believe in such extreme
scenarios. Countries simply face structural issues, combined with
deficits which do not match their growth target.
Once a stable and
reasonable growth outlook will be identified by the financial
market in the eurozone, the leasing market will rebound quickly as
leasing is one of the most preferred means to finance equipment
acquisition among the SMEs.
grant.collinson@vrlfinancialnews.com
