Airlines, automakers at the forefront. And it has only just begun. EU waives rules banning state aid. Ryanair, which doesn’t need a bailout, is furious.
Governments around Europe have rolled out a dizzying array of measures, including loan programs, tax payment deferrals, and furlough schemes, to help companies, large and small, withstand the fallout of the Covid-19 lockdowns. Large companies have also benefited from massive central bank purchases of their corporate bonds, which has helped to keep their debt costs low. But for some companies, including many of Europe’s largest corporations, it’s not enough.
The UK government last week launched Project Birch, an initiative that will allow the UK treasury to offer “last resort” support to select firms in order to avoid bankruptcy-type restructurings, that could have severe repercussions for bondholders and stockholders. Those firms could include Tata-owned Jaguar Land Rover, which is currently in talks with the government to secure a loan of more than £1 billion.
“In exceptional circumstances, where a viable company has exhausted all options and its failure would disproportionately harm the economy, we may consider support on a ‘last resort’ basis,” said a Treasury spokeswoman, who reassuringly added: “As the British public would expect, we are putting in place sensible contingency planning and any such support would be on terms that protect the taxpayer.” Not exactly reassuring given the UK government’s recent record when it comes to contingency planning.
Across Europe, governments are following the same playbook. The EU has granted member countries unprecedented fiscal leeway to deal with the economic impact of the coronavirus, enabling governments to open the spending spigots, and wave aside EU budget rules and competition rules that were supposed to, but didn’t really, limit government borrowing and state assistance for national companies.
In France alone, the government has mobilized €450 billion of funds to mitigate the impact of the lockdown. That does not mean France has spent €450 billion, since roughly two-thirds of the amount are in the form of state-guaranteed loans. Those guarantees will only be needed if the companies that use them default on them. Nonetheless, the government still expects France’s public debt to reach 115% of GDP by the end of this year — almost double the 60% ceiling established in the EU’s Stability and Growth Pact.
So far, the biggest recipients of state aid in Europe are European airlines, some of which are still refusing to refund passengers for cancelled flights. Some airlines that don’t want government handouts, such as budget carrier Ryanair, have taken legal action against the airlines and governments involved in the bailouts.
Unlike most airlines, Ryanair has €4.1 billion in cash reserves. Its CEO Michael O’Leary is furious that his cash-flush airline will have to compete with airlines primed with bailout cash, including Italy’s Alitalia which has turned a profit only once since 1946.
This week, it looks as if it’s the car industry’s turn for a bailout bonanza, with the likes of Renault, Jaguar Land Rover and Fiat Chrysler expecting billions of euros in direct loans and state guarantees. Today, Macron announced an €8 billion plan to save the country’s car industry that includes government subsidies for car buyers and long-term investment in innovative tech, especially battery-electric vehicles.
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Nick Corbishley 