The Impact of Changing Capital Markets on Developing Economies
Creating deeper and more integrated capital markets within the European Union is a central plank of the European Commission’s plans to boost investment, employment and growth for its 28 members.
The Commission’s planned Capital Markets Union has even been proclaimed ‘a new frontier of Europe’s single market’.
“The Impact of Changing Capital Markets on Developing Economies,” one of the panels at this year’s EBRD Annual Meeting and Business Forum in Tbilisi, Georgia, examined the way the Commission’s proposals – and other changes in the capital market environment – will affect emerging markets and the EBRD’s region in particular.
“The idea is to unify Europe’s capital markets and create a single and simple platform for smaller companies to access funding which will be a rival to traditional banking,” summed up William Weaver, Managing Director, Head of EMEA Debt Capital Markets and Syndicate, Citigroup.
The ambition is laudable. The reality, however, is that similar initiatives have been in the works for as long as the EBRD has existed (since 1991).
“The most important thing to do is to start at home,” suggested András Simor, Vice President and Chief Financial Officer, EBRD. “This is what the EBRD has been very active doing, creating the very basics of local capital markets.”
“The first priority is to develop a buy-side, local investor base,” agreed Mr Weaver. “That is the investor base that will always be with you and always be more sticky.”
The European Commission’s diagnosis of the ills it is trying to remedy - heavy reliance on banks for investment, significant differences between financing conditions in countries and SMEs’ limited access to finance – parallels the EBRD’s analysis of its own region’s problems.
The EBRD region, however, includes Eurozone members, EU members not in the Eurozone, EU accession states and many countries that are unlikely ever to gain EU membership but still retain close links to the EU, not least for investment flows.
Georgia, the event’s host, harbours long-term ambitions to join the EU but, for now, the prospect of membership, is a distant one. What is it to do?
“Georgia is a very small country,” said Archil Mestvirishvili, Deputy Governor of its National Bank. “To reach the size when we will be able to attract institutional investors will be very difficult.”
Ralph Atkins, Capital Markets Editor of the FT, on integrated capital markets and the EBRD region.
For the Commission, the current fragmented nature of Europe’s capital markets and their division along national lines represent a sharp contrast to deeper and more liquid capital markets, such as the US market where capital markets solutions to problems such as infrastructure finance represent the norm rather than an exception.
But one member of the panel cautioned against trying to replicate the US experience in a European context.
“We’re not the US,” said Niki Beattie, Founder, Managing Director of Market Structure Partners. “We are a very heterogeneous region. It’s very difficult to say that we can fix this with one sweeping solution.”
The need to improve capital markets across the EBRD’s region has intensified since the financial crisis, when banks and investors have tended to retreat to their home markets.
One panel participant preferred not to see creating a capital markets union as some sort of competition between two potential sources of funding.
“This is not a zero-sum game,” said Liviu Voinea, Deputy Governor of the National Bank of Romania. "We should not see this in terms of capital markets or banking. They go hand in hand.”
The panel, which was moderated by Ralph Atkins, Capital Markets Editor of the Financial Times and played to a packed house with standing room only for latecomers, was timely.
The consultation period for the Commission’s Green Paper ‘Building a Capital Markets Union’ ended two days before the session and, over the next few years, much is likely to change in this area of financing.