Financing gaps of companies during the Covid-19 pandemic

For firms' business and investment decisions their access to finance is a critical determinant. In times when access to finance becomes tight, corporations face either higher capital costs or they have to postpone their investment decisions when credit lines are not prolongated. Since business investment is a prerequisite to spur economic growth, access to finance is a critical variable in business cycle stabilization. Therefore, central banks take a close look at the financing conditions of companies, and they have to loosen monetary policy when access to finance becomes tighter. In contrast to the US, where firms rely to a great degree on capital market financing, euro area firms are dominantly funded by banks. For our empirical analysis we use data from the Survey of Access to Finance of Small and Medium-sized Enterprises (SAFE) from the ECB. SAFE is a semi-annual survey and it covers the relevant data on financing conditions from the viewpoint of euro area firms with a focus on SMEs. The first wave started in the first half of 2009. Regression analyses with only three macroeconomic variables (yield on sovereign bonds, GDP growth and unemployment rate) on the percentage of vulnerable firms yield the result of a strong positive correlation with long-term interest rates. This effect is reduced when adding access to finance or the change in the external financing gap to the equation, which are also positively correlated to the vulnerability of SMEs. At the same time, the vulnerability of companies is negatively correlated with GDP growth indicating that in times of economic crisis, the vulnerability is higher than in times of economic boom. However, the coefficient loses its significance, when the change in the financing gap and access to finance were added to the regression. Since these two variables are also dependent on the business cycle, they better explain the vulnerability than GDP.