On top of emergency liquidity measures provided to European SMEs to fight Covid-19, we estimate that Italian SMEs need EUR70bn of recapitalization, French SMEs EUR30bn and German SMEs EUR3bn — after excluding pre-existing zombies. While state-guaranteed loans have so far helped companies avoid a liquidity crisis, European SMEs are facing excessive debt levels, deteriorated profitability and undercapitalization, a bad combination for medium-run solvency, with French and Italian SMEs being most at risk. French non-financial corporations’ debt is expected to have reached more than 81% of GDP in Q2, much above Germany’s levels of 43% and the Eurozone average of 63%. This comes against the backdrop of below peer equity ratios (37% of total assets, see Figure 1) and strongly deteriorating profitability: French non-financial corporations’ margins have lost more than -7pp since the start of the year and stand at the lowest level among EU-27 countries. While the debt issue is less of a concern in Italy (65% of GDP) in a context of a higher resilience of margins, equity ratios of Italian SMEs also stand below 40% level considered as adequate.
Figure 1 – Equity gap, EURbn
Figure 1 – Equity gap, EURbn