Securitization a Key Funding Tool for European Economy

Analysis of European Central Bank and Bank of England data shows that securitization continues to play an important role as a funding tool for the European economy, says Moody’s Investors Service in a report published Monday.

“Securitization is a longstanding financing technique, promoting funding diversification and expansion of liquidity sources,” says Frank Cerveny, Vice President and Senior Research Analyst at Moody’s. “It supports the working capital and long term investment needs of small and medium-sized enterprises, as well as property and auto vehicle purchases made by consumers,” Moody’s.com reported.

In the first quarter of 2017, for example, securitization funding accounted for 11.4% of the total balance of loans to households in the eurozone plus Britain (down from 18.0% in mid 2011). During the same period, of the total balance of loans to non-financial corporates in the eurozone plus Britain, securitization funding accounted for 4.2%, down from 5.7% in 2011.

Since 2008, European securitization market volumes have declined, owing to lower issuance volumes in conjunction with amortizing transactions. On average, the share of loans to corporates and consumers funded via securitization has declined accordingly, with the securitization market yet to further recover.

However, some countries have securitization funding shares which significantly diverge from the European average. For instance, the corporate related securitization funding share is significantly above the current European average (4.2%) in Belgium (15.4%), Italy (8.1%), UK (7.8%) and Portugal (6.8%).

Likewise, the consumer related funding share exceeds the European average (11.4%) in Ireland (34.3%), The Netherlands (33.5%), Belgium (30.2%), Spain (20.5%), Italy (18.4%) and Portugal (16.9%).

Securitization also provides a large share of highly rated bonds and sound credit performance. As of June 2017, 58% of all outstanding EMEA (Europe, the Middle East and Africa) volumes Moody’s rated was Aaa.

 Doomsayers Disappointed

Two recent straws in the fair winds enjoyed by the eurozone: Jean-Claude Juncker’s upbeat state of the union speech to the European Parliament last week, and the return of Portugal’s public debt to the “investment grade” division of bond markets.

The doom-mongers who claimed Europe was condemned to stagnation unless and until it “completes” its monetary union are being proved more incorrect with each day that brings improved economic news, showing that it was not impossible for euro countries to rack up proper growth after all. In fact, once the last eurozone downturn ended at the start of 2013, there is nothing to distinguish the eurozone growth experience from the first four years of the post-crisis recovery in the US, the only other comparably large advanced economy.

As an academic business cycle dating committee pointed out last month, in 17 quarters since it bottomed out, the eurozone economy grew by just over 7% (including second-quarter data for 2017, this now amounts to 7.8%), not far below the 8.1% the US economy racked up in the same amount of time after its low point in spring 2009 (or 9% after 18 quarters).