Monday, August 4, 2014

Europe's troubles are microeconomic

Nice article in the Financial Times about the path to growth in Southern Europe: "good" deleveraging, then new equity capital to buy up the failed companies.

Good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls. 

But good deleveraging requires clear legal rules to restructure debt:  

...insolvency regimes across Southern Europe are too weak and borrower-friendly, and judicial systems too cumbersome, to enable the swift resolution of bad debts. In Italy, Greece and Cyprus, for example, it can take 10 years for a bank to get its hands on its collateral through the bankruptcy courts.

And finally, once the loans get restructured, the assets must be sold off to new owners.  New owners have been taking control of real estate, but not the smaller family owned companies:

The snag is that this problem may be largely cultural—and therefore more difficult to fix. Many businesses in Southern Europe are family-owned and family-run. These family shareholders may be reluctant to bring in outside capital, preferring to walk away rather than hand over control to financial investors. 
At the same time, many equity providers may be wary of taking control of businesses in parts of Europe where governance may be weak and success can often depend heavily on close personal relationships with politicians, officials, banks and suppliers. The alternative is to share control with the existing owners, which private equity is typically reluctant to do.

1 comment:

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