The absurdity of today’s credit system

The absurdity of today’s credit system

by Myret Zaki, chief editor of the economic magazine “Bilan”, Western Switzerland

When it comes to getting a loan, the discrepancy between big and small companies is worrying. The former get easy access to the capital market. The latter have greatest difficulty in obtaining credit as they lack the critical size in order to be able to borrow from the banks on favourable terms. If one realises that these small businesses are the largest part of the Swiss economy – and this is the case in all European countries – this development is very regrettable. In addition, one can wonder whether, under these circumstances, it is still surprising that OECD countries’ lack of growth has become chronic.
Small and medium-sized enterprises (SMEs), which are not listed on the stock exchanges, have difficulties obtaining loans from the banks across Europe. The reason for this is the demanding requirements of the banks, which require in-depth debt and profitability analyzes, irrespective of the desired loan amount and the size of the company.
This means high processing fees, which mean high interest rates for SMEs. In western Switzerland, interest rates on bank loans, even for SMEs, are on average at 4.5%. One can already ask what real risks a bank is to assume in the form of a 200,000 francs loan, if at the same time they put several billion on the capital market at risk.
The high cost of borrowing for small businesses contrasts the incredible ease with which large companies gain access to huge amounts of cash. These loans are not only free (interest rates close to 0%), but recently, corporations such as Henkel in Germany or Sanofi in France have issued bonds with negative interest rates for the first time. In other words, they are compensated for their debt!
Others will soon follow and put bonds with coupons lower than zero. Welcome to the age of guaranteed losses for investors and helicopter money for large companies! Such corporate bonds are possible because the European Central Bank buys corporate bonds. For years, the ECB has been trying to boost growth by purchasing European government bonds at billions. When this policy did not benefit, the ECB started to buy corporate bonds this year, which increased their price and lowered the return to negative territory. More than 700 billion euros of European bonds with investment grade, i.e. 30% of the market, are already being traded at negative interest rates.
What is the interest of big companies, their markets, their innovations and their efficiency when money is earned through debt? They can be content to lend money without reason, instead of actively generating growth, production and jobs. When there were still positive interest rates, their function was to provide incentives for the debtor company to work this loan productively to later repay principal and interest to their creditors, and also to secure a profit for the work they performed. Currently, this procedure is disabled.
On the one hand, SMEs – the lungs of our economy – pay high interest rates if they are fortunate enough to meet the specific conditions of the banks. On the other hand, large companies that have access to the capital market can make a lot of money through debt. This makes it easier to understand why productivity in Europe is at zero level, although this would be the key factor to improve living conditions.     •

Source: Bilan from 21.9.2016

(Translation Current Concerns)

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