Positive correlation between recoveries and bond financing
The substitution of bond debt for bank loans that occurs during a recovery phase appears to reflect banks' difficulty in meeting companies’ demand for credit (see Becker et Ivashina, 2014). Access to bond markets as an alternative source of financing would increase investment and thus accelerate the recovery. In Grjebine et al. (2017), we highlight the existence of a link between the structure of corporate debt and the strength of the recovery. Chart 1 shows the change in real GDP after a peak of activity, depending on whether the initial value of the share of bond financing is high (above average, full line) or low (below average, dotted line) . At the beginning of the recession, the trend is similar: in the first three quarters, the two curves are very close. Subsequently, the two curves diverge.
The recovery starts earlier in the countries where the share of bond financing is high - on average three quarters after the peak, compared with six quarters in the economies with a low share of bond financing - then the gap widens. Economies where the share of bond financing is high return to pre-recession GDP levels five quarters after the peak, while economies with a low share of GDP only reach such levels eleven quarters after the peak. At this date, the real GDP of the economies where the share of bond financing is high exceeds its value by 5% at the height of the cycle. The positive relationship between the recovery dynamics and the level of the initial bond share exists irrespective of the nature (financial or non-financial) of the crisis. It is maintained when we exclude the United States and the 2008 recession from the sample. The debt structure also has a specific effect when we take into account the effect of firm size, the development of financial markets and the quality of institutions.
Towards a diversification of sources of financing in the EU?
These analyses contribute to supporting the Capital Markets Union (CMU) project which aims at deepening and further integrating capital markets in the 28 EU Member States. One of the Commission's stated priorities is to reduce the reliance on bank credit to finance growth, for example by reducing the critical size from which companies could access bond financing, a method of financing which is the preserve of the largest companies in Europe. The diversification of debt instruments would contribute to a better capital allocation and more investment, as a complement and support of other CMU initiatives such as strengthening equity financing and supporting venture capital funds.