For years, there’s been an important distinction between the US and European financial systems. In the US, corporate borrowing was typically much more tied to capital markets. That means companies that needed to borrow were much more likely to do it by selling bonds to the public. Across the pond, companies typically relied more heavily on borrowing from banks. Selling debt in the bond markets was something only the largest continental enterprises would do.
Things have changed since the financial crisis hit. Morgan Stanley European banking analysts captured the shift perfectly in this chart, which shows lending from European banks (the mustard-colored line) collapsing as bond issuance by companies (the blue line) increases. (The numbers were cobbled together by Morgan Stanley researcher using data from sources such as the ECB, Bloomberg, S&P and Bank of American Merrill Lynch Indices.)
Of course, there’s one obvious problem here. While bond market borrowing has picked up, it hasn’t come anywhere close to making up for the decline in lending from banks. The result is a European credit crunch for smaller companies, which tend to be less easily able to tap the bond markets. “Le crédit crunch, il crunch, el crunch. Whatever the language, not much is lost in translation: As the euro-zone economy slumbers in recession and its banks shrink, companies are finding it harder to fund their operations and investments,” wrote the Wall Street Journal’s Francesco Guerrera in a column last year that effectively encapsulated the concern at such smaller companies.
And that’s part of the reason why the European Central Bank is desperately trying to find an efficient way of ensuring that small and medium-sized firms get access to the cash they need. If they can’t, don’t bet on the European economy getting back into gear any time soon.