Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Rate Cuts Are Not Helping Small Business
Transcript
- Lucas: The European Central Bank cut its deposit rate by a quarter point in June — the third cut this year. And yet, if you run a small manufacturing firm outside Stuttgart right now, your bank is probably still raising the spread on your loan. Luna: So the rate cuts aren't reaching the real economy — at least not the parts that rely on relationship lending. Lucas: Exactly. The ECB's Bank Lending Survey for the second quarter came out last week, and it confirms something uncomfortable: banks are actually tightening credit standards for small and medium enterprises, even as they loosen for large corporates. The net percentage of banks reporting tighter standards for SMEs was plus 6 percent — meaning more tightening than easing. Luna: And for large firms? Lucas: Minus 4 percent — net easing. So the transmission mechanism is splitting along company size, not country lines. That's a new pattern for this cycle. Luna: It almost feels like the ECB is pushing on a string — lower rates should stimulate borrowing, but if banks don't want to lend to smaller firms, the policy just doesn't flow through. Lucas: Right, and there's a structural reason for that. Since the pandemic and the energy crisis, European banks have become more risk-averse when it comes to unsecured SME lending. They're piling into government bonds and secured corporate debt instead. The German Bundesbank noted in its June financial stability report that SME loan rejection rates are at their highest since 2013 outside of Covid lockdowns. Luna: That's striking because the German Mittelstand is the backbone of the export machine. If those firms can't get working capital or investment financing, it feeds directly into the industrial weakness we've been tracking. Lucas: It does. And the timing is awkward because French political uncertainty is adding another layer. Christine Lagarde left the door open this week to an early ECB exit — she's mulling a move into French politics. That raises questions about continuity just as the council is navigating this tricky phase. Luna: Right — if Lagarde leaves early, you lose the institutional memory of this exact policy challenge. Her successor might lean hawkish or dovish, but either way, the SME credit issue isn't going away. Lucas: Let's look at the market reaction, because it's telling. German equities via the EWG ETF are up over 4 percent in the past five days — that's a strong week. Italian equities via the EWI are up about 3.4 percent. But those gains are concentrated in large-cap exporters and financials. The broader European small-cap indices are flat to down. Luna: So the ETF performance is masking a two-tier economy. The large caps can access capital markets directly — they issue bonds, they do equity raises. The SMEs rely on bank loans, and that channel is constricted. Lucas: Precisely. And the ECB's own data shows that the net demand for loans from SMEs actually increased in Q2 — firms want to borrow. But supply is the bottleneck. The survey cites banks' perception of higher default risk and lower collateral values, especially in commercial real estate. Luna: Which circles back to something we talked about a few episodes ago — the divergence between core and periphery isn't just about fiscal space or bond yields. It's also about the structure of the banking system. In Italy, many SMEs have long-term relationships with local banks that are more willing to lend through a downturn. In Germany, the Landesbanken and Sparkassen are pulling back faster. Lucas: That's a really important nuance. The German banking system is highly fragmented and risk-sensitive right now. The Italian system, despite its own non-performing loan legacy, has shown more continuity. But neither system is fully transmitting the ECB's policy, and that's a problem for the currency union as a whole. Luna: One concrete number: the volume of new loans to eurozone non-financial corporations in May was down 1.2 percent year-over-year, according to the latest monetary statistics. That's the third consecutive monthly decline. Lucas: And when you strip out the large corporate loans and look only at loans under one million euros — which is the SME bracket — the decline is over 4 percent. So the headline loan growth figures that policymakers cite are being carried by a handful of mega-borrowers. Luna: That's the kind of detail that doesn't make the front page of the Financial Times, but it matters enormously for employment and innovation. SMEs employ about two-thirds of eurozone workers. Lucas: Which is why I think the ECB may need to look beyond the standard rate tool. Some economists have floated targeted lending facilities for SMEs — a kind of TLTRO but ring-fenced for small firms. The Bank of England did something similar during the pandemic with its Term Funding Scheme for SMEs. Luna: Would that require a change in the ECB's collateral framework? Because right now, SME loan portfolios are harder to pledge as collateral than government bonds or investment-grade corporate paper. Lucas: It would. And that's politically sensitive because it means accepting higher-risk collateral on the ECB's balance sheet. But if the alternative is a prolonged credit crunch for the real economy, the council might have to consider it. Especially with Lagarde potentially exiting and a new leadership dynamic ahead. Luna: Speaking of the show's own dynamics — if walking through the economy with us has made something click for you, and you'd like to help keep this podcast ad-free, listeners have been supporting us at buy me a coffee dot com slash fexingo. No pressure, just if it feels right. Lucas: Yeah, and we mean that sincerely. This show is a labour of love — we don't do sponsors, we don't do ads. So listener support is what keeps us independent. Same URL: buy me a coffee dot com slash fexingo. Luna: Alright, back to the credit channels. Lucas, you mentioned the collateral framework — do you see any movement from the ECB on that front? Lucas: Not yet publicly. The account of the June meeting showed some discussion of the SME lending weakness, but no concrete policy proposals. I suspect the council is waiting to see if the summer data improves. But if the July survey shows another tightening, they'll have to act. Luna: So what should our listeners — many of whom are professionals or investors — watch for as a leading indicator? Lucas: Two things. First, the ECB's quarterly Bank Lending Survey for Q3, due in October. If the net tightening for SMEs persists, that's a red flag. Second, watch the spread between the composite cost of borrowing for SMEs versus large corporates. That spread has widened by about 40 basis points since the start of the year. If it hits 100 basis points, you'll see political pressure build. Luna: And on the positive side, if the ECB does introduce a targeted lending facility, that could be a catalyst for European small-cap stocks, which have lagged large caps significantly this year. Lucas: Exactly. The iShares MSCI Europe Small-Cap ETF is down about 2 percent year-to-date, while the large-cap Euro Stoxx 50 is up around 8 percent. A policy fix for SME credit would directly address that divergence. It's one to watch. Luna: Great angle. Thanks Lucas. Lucas: Thanks Luna. We'll keep tracking it.