Are European Companies Ready for Life Without Draghi? by Don Quijones

When the European Central Bank stops buying bonds, bond issuers must pay higher interest rates. The question is: can they? From Don Quijones at

Not going to be easy, especially for “zombie” companies.

An unusually fierce spat broke out this week between two of Europe’s biggest utilities companies, Spain’s Iberdrola and Italy’s Enel, both of which are locked in a bidding war for the Brazilian electricity company Eletropaulo. The Spanish firm accused its Italian rival, almost a quarter of which is owned by the Italian State, of unfair competition due to its access to cheaper debt.

“With the obvious support of the State, Enel clearly benefits from a privileged regulatory situation in Italy, which makes access to the capital markets both cheaper and easier,” complained Iberdrola’s CEO Ignacio Sánchez Galán in a scathing letter to the European Commission. He called for a debate on the privileges certain state-owned companies continue to enjoy despite EU competition laws on illegal state aid.

Sánchez Galán raises an important point: in the EU, partly or majority state-owned companies like Enel and Électricité de France (EdF) clearly enjoy funding benefits over their rivals, especially with the Eurozone’s sovereign bond market still being propped up by the ECB.

But he also omits an inconvenient fact: his own company, Iberdrola, is one of the biggest beneficiaries of the ECB’s corporate bond buying program. As a result, it has been able to pay next to no interest on new debt for the last two years.

State-owned companies like Enel and EDF have benefited two-fold from the ECB’s largesse, first from its corporate bond buying, and secondly from its sovereign bond buying. At one point the central bank was buying €80 billion of sovereign and corporate debt per month, which helped push yields into the negative for many securities. This helped push down the funding costs of Member States’ national debts while giving a select group of European companies and subsidiaries a massive funding advantage over smaller rivals.

On a number of occasions, the corporate bonds were not even bought on the open market; instead, the ECB bought them directly from the companies through “private placements.” These arrangements enabled the companies involved, including Iberdrola, to raise cash more quickly without having to jump through the regulatory hoops.

To continue reading: Are European Companies Ready for Life Without Draghi?

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