AGORADA+2020: Sustainable Corporate Finance After COVID-19
AGORADA+ is one of the 4 main events organised by EURADA (the European Association for Development Agencies). It normally takes place at the end of the year in a region of one of the association’s members. The title of this 2020 edition will be “Sustainable corporate finance after the COVID-19 outbreak”. As we have been discussing, the coronavirus pandemic has had a tremendous impact on the corporate and financial worlds, making the historical data of companies unreliable and, therefore, preventing the correct assessment of their financial situation through traditional methods; hence, new financial instruments and corporate strategies should be developed to guarantee the survival of many European companies. AGORADA+2020 will take place on November 12th and will aim at becoming a forum where regional development practitioners and finance experts can exchange good practices, transfer knowledge and discuss innovative measures and finance instruments to raise an economy heavily damaged by the undesirable effects of the pandemic and to guarantee sustainable, long-term corporate growth. The main event will be followed on November 13th by an event organised by the European Crowdfunding Network.
If the circumstances permit, the topics discussed during the event will be expanded, presence-based, in AGORADA 2021. This conference will be organised in cooperation with IVACE, the Regional Development Agency of the Valencian Community (Spain), and will take place in Valencia between the 12th and the 13th of May 2021.
The year 2020 opened with the outbreak in the Chinese province of Wuhan of a new type of coronavirus called SARS-CoV-2. It took some months for the virus to spread worldwide and be qualified by the WHO as a pandemic. The European Union, due to the structure of the demographic pyramid of many of its Member States, the liberties enjoyed by European citizens and the lack of previous pandemics that might have motivated the creation of preventive plans, was particularly affected by the outbreak of the SARS-CoV-2 virus. In order to prevent the escalation of deaths and a potential collapse of public health systems, governments from all countries in the world responded to the crisis almost unanimously declaring regional and national lockdowns, limitations of the liberties of movement and association, and the state of quarantine. These measures will likely have a tremendous impact on European economies, an impact comparable to that of the global finance crisis of 2008, or even greater, being the major challenge faced by the world economy since the crash of 1929.
The difference between the COVID-19 crisis and the Great Recession is that while the latter was caused by endogenous factors, the former has its roots in an external shock (although the state of the world economy was not at its finest previous to the outbreak). At the same time, whereas the previous crisis particularly affected the Western World, the current one is a worldwide phenomenon that could impact more severely developing economies and emerging markets. Forecasts of a V-shape recovery have been dismissed and now experts assume that the recovery will take the form of a U in which the duration of the stagnation period is unknown. The OECD estimated that the GDP of most advanced economies may suffer a decrease between the 20 and the 25%, and, according to EIB calculations, European companies could lose revenues between a 13 and a 24% of EU GDP.
Impact of the pandemics on the corporate and finance sectors
The widespread of the shock and the large number of affected companies pose a risk of a liquidity crisis that could lead to a corporate and financial crisis. The acute reductions in revenue expectations for firms and their inability to cut costs is threatening their profitability and interest coverage ratios. With a decline in earnings and difficulties to even sell existing inventories, the long-term viability of many firms, especially short and medium-sized enterprises (SMEs), is threatened and this could lead to bankruptcies or voluntary shutting downs. The closure of previously healthy and internationally integrated companies would cause the destruction of accumulated human and organisational capital as well as the disruption of global value chains. Uncertainty about the development of world economy will lead to a reduction in consumption and a tightening of borrowing costs and financial conditions. Consequently, a corporate solvency crisis could follow that negatively impacts economies in the long-term by damaging employment rates, productivity and economic growth.
Measures adopted in the EU
Since the outset of a financial crisis is highly probable, States must take a proactive and resolute approach to smooth the curve of firm mortality, coordinate policies to maintain financial stability, ensure that the financial system can meet the public needs for financial services through digital channels and to cooperate internationally to support developing economies and emerging markets. These aid programmes should facilitate the flow of financial resources without compromising the sustainability of the financial sector, avoiding moral hazard and attending to the particularities of each sector and country as well as to how the shock has affected them. Conscious of the challenges the economy is facing, governments from all over the world have been taking emergency actions during the last months to tackle the negative economic effects of the pandemic.
Among the measures the EU institutions have launched we can identify a €37 billion investment package aimed at supporting Member States’ responses to the pandemic, SMEs, healthcare operators and companies in the most affected sectors (including hospitality and tourism); sector-specific adjustments to EU policies and interpretation of EU laws, including a relaxation of the State-aid rules and the slot regulation affecting airlines, as well as additional support for agriculture, agri-food and fishing; and a relaxation of prudential rules for the banking system aimed at increasing access to credit for firms in need.
The Commission has so far approved over 170 national measures, amounting to over €1.9 trillion in State aid to the EU economy. For the first time, the Commission has proposed a new instrument to mitigate unemployment risks and has temporarily implemented the Support to Mitigate Unemployment Risks in an Emergency (“SURE”). On 27 May 2020, the Commission proposed a new Solvency Support Instrument (the “SSI”) to help kick-start the European economy and prevent otherwise healthy companies from going insolvent because of the pandemic. On 2 July 2020, the Commission announced that it will extend certain State-aid rules, which were due to expire in 2020, in order to provide legal certainty. The Commission simultaneously announced its intention to temporarily amend the State-aid rules in direct response to the COVID-19 pandemic.
EURADA has been preparing for the last few months a list with the best practices and measures carried out by Development Agencies around Europe, EU institutions and other international organisms. The list can be reached by clicking on this link.