Loans not an option
The EU budget for economic relief and recovery policies now amounts to EUR 3,900 bn. The most prominent of these are in tax-related policies, support for enterprise salaries, direct cash support, and government loan guarantees. Along with these is the policy of pumping money from the central bank through bonds, reducing of interest rates, and some other liquidity creating tools.
Though a few regulations have been relaxed in terms of capital requirement and liquidity, there are also loans that have been postponed. However, although preferential loans are now available at low interest rates, many businesses still do not either dare to borrow or are no longer in a strong position to borrow, even with government guarantees.
Much before the Covid-19 pandemic changed the business world, debts in the corporate sector were already a deep warning for the financial sector. As a rebound after the 2008 global economic crisis, and along with maintenance of low interest rates at large Central Banks for a long period of time, the GDP in major economies had suffered.
At present, the average interest rate of bonds in Europe is only 1.69%. Bank loans increased during the Covid-19 pandemic in the months of March and April. If compared with the same period in 2019, French businesses increased loans from EUR 16 bn to EUR 61 bn, Germany increased from EUR 9 bn to EUR 29 bn, and the EU markets increased seven times, from EUR 24 bn to EUR 174 bn.
Thus, it can be seen that debts in EU businesses touched the ceiling, and now even with preferential loans at low interest rates and government guarantees the resistance of these businesses has also reached a limit. The reason is that despite the reopening of the economy, social distancing is still mandatory and thus international business trips are at a minimim. Many businesses are only being able to recover 70% to 80% of sales now, as compared to before the Covid-19 pandemic.
For businesses that still have the ability to borrow, enterprise owners need to consider whether to borrow more to maintain operations and running costs in the current bleak prospect of the economy not recovering in the next one or two years, or to just apply for bankruptcy. As every loan has to be paid back eventually, it becomes a constant burden for any business.
However, for businesses that no longer have the ability to borrow, or find sources for borrowing, and when the government starts cutting important support such as salary costs, bankruptcy looks as an only solution. Hence, many business owners will need time to accumulate capital to return back to business or establish a new business at a smaller scale than before.
Although no one wants to see a worsened scenario, a wave of bankruptcies and layoffs may likely be unavoidable in the next few months. However, if governments remain strong in their support of businesses, the transition from guarantee to direct cash injection or purchase of equity, could help businesses revive once again. Another likely scenario is having to choose which business is allowed to survive and which business goes under.
At such a time, priority may probably be given to small and medium enterprises, as not only governments think that rescuing large firms is more effective, but also because larger firms have more resources to influence policies that benefit them. But with what's going on, governments do not have much room to raise their budget deficits, raise taxes or cope with the return of inflation, so it is very likely that the process of selecting and eliminating enterprises will certainly take place. Next, the domino effect will spread to Europe, to countries with close linkage in trade and investment with this bloc, which includes Vietnam.
Businesses in Vietnam are closely associated with those in the EU market, and with high expectations from the EU-Vietnam Free Trade Agreement (EVFTA) recently approved by the National Assembly, there is more need to be proactive and regularly monitor the situation across the continent, have contingency plans, as well as be fully prepared for the worst case scenario or hopefully even an unexpected turn for the better.