Analysing Recent Developments in the Financing of Euro Area Non-Financial Corporations

Abstract

The recession that erupted in 2007 originated in the financial sector, where specific developments triggered and/or amplified the need for the real economy to adjust (see European Commission, 2010a and 2010b for non-technical discussions). In this context, several issues have been raised. One issue relates to the presence of bottlenecks in the distribu- tion of credit by monetary financial institutions (MFls), resulting from the deleveraging forces in the banking sector. The intensity of the rela- tionship between bank credit and investment may be state-dependent, with the possibility that the restrictions become binding when capi- tal expenditure recovers. Another related issue concerns the issuance of debt securities by firms, which has remained relatively robust since the beginning of the financial crisis. The movements recorded over the period could suggest a substitution between bank finance and market finance, possibly reflecting the reaction to constrained access to bank finance. Alternatively, the pattern observed could reflect a normal cycli- cal profile, or the response to other developments such as changes in financing costs. Finally non-financial corporations (NFCs) have rebuilt their cash position- This may reflect weak investment opportunities, or a precautionary buffer in reaction to tight financing conditions.