Tag Archives: SMEs

Also in public media in Finland: the purifying influence of economic crises

Below follows a translation and commentated version of an article that was issued today on the Finnish YLE News -website. I think it is relevant, because (albeit through anecdotal evidence) it highlights some of the commonly held opinions on the Eurocrisis and the tightness of financing for SMEs, which I reported on last week as well. The comments by the persons interviewed are to be taken seriously, especially in the Finnish context, because Vesa Puttonen is a Professor of Finance in the Aalto-University and Pentti Mäkinen is the SME Affairs Director of the Confederation of Finnish Industries. Both have distinguished careers, and through their position have influence on the Finnish public debate.


“Creative destruction” eliminates small businesses – high interest rates crush dreams of growth.

by Jaakko Mannermaa

The waning of purchasing power and the tightening of loan conditions worsens the distress in Southern Europe, which also affects the outlook of Finnish SMEs. The near future remains bumpy, forecast experts.

The European growth motor doesn’t start because of financing troubles of small and medium-sized enterprises. Enterprises are divided into two classes on the credit markets, also geographically within Europe, says Professor of Finance Vesa Puttonen of the Aalto-University in Helsinki.

– Generally speaking, SMEs complain about a lack of demand, according to reports of the ECB. The situation in Germany, Austria and also Finland is clearly better than in the Souther countries, where besides the issue of demand, companies also complain about the level of costs and the weak availability of financing.

According to this news however, also Finnish SMEs experience rather tight financing.

According to Puttonen, the situation is especially bad in Greece, Ireland, Spain and Portugal, where banks don’t have the capability and/or will to finance SMEs.

For instance, in Spain large enterprises pay around 4% interest on their 10-year loans, but SMEs pay twice as much. Nonetheless, SMEs create most of the new jobs.

In Italy, on the other hand, where about 80% of the workforce is employed by SMEs, the wave of bankrupcies has decreased confidence even more. Banks demand, besides high interest rates, such large collateral that many firms don’t have the preconditions for a loan of more than a few thousand euros.

Puttonen: borrowed money doesn’t belong to everybody

Money is expensive for small and medium-sized enterprises, even though the European Central Bank has kept the key interest rates low for a long time. This is due to the fact that each bank will assess the risks and benefits of the relationship in their own way, says the Director of SME Affairs of the Confederation of Finnish Industries (EK) Pentti Mäkinen.

– Banks have to take into account the price of financing they pay themselves, when making loan decisions. That is not only dependent on the ECB.

They also have to worry about their own capitalization levels; hence they are less eager to borrow money to firms unless the risk is perhaps minimal.

SMEs have traditionally relied on bank loans for financing, because other than large firms they don’t have much possibility to scrape capital from the markets. If the money supply from banks dries up, the only way left is to pump own money into the firm – if there is any.

Vesa Puttonen points out that financing is not a commodity that should be given to everyone. According to him, business should not get a loan, if the situation becomes unsustainable.

– If the company doesn’t have demand (for its products), then it is not going to grow by giving it a loan. Financing may enable the company to continue, but creative destruction should be allowed to eliminate businesses that are not sustainable.

Schumpeter is alive and he lives in Finland! I would say first of all, what about banks in Germany, the Netherlands, France…shouldn’t they have been allowed to disappear when they became unsustainable? Second: Puttonen’s argument implicitly assumes that a company’s position is somehow abstractable from the economic and political context – enough has been written about capital flows and competitiveness in the context of the EMU (with a star role for French and German banks) that I won’t repeat that. But the question here is ‘why isn’t there demand’ for the firm’s product rather than ‘is there demand?’. Once we get to the ‘why’ question, we also have to face all kind of nasty and difficult questions about the nature of EMU and e.g. the role of the ECB, the implicit exchange rate benefit of Germany within the Eurozone etc. In terms of pure financing Puttonen is of course right, but in the context of the Eurocrisis it is a bit more complicated than that.

EK’s Mäkinen points out that Europe is Finland’s most important market: the export of 50-60% goes to other EU countries. How Finland can cope is linked to the rest of the European SMEs.

– The point is that Finland’s export structure is strongly focused on investment goods.  SMEs are important suppliers all over Europe and as such in a very important position as buyers for Finnish goods, says Mäkinen.

It is very good to see that the Confederation of Finnish Industries sees the strong links between the Finnish and European economies. Finland can not on its own be a tough accountant and just mind its own business (no pun intended). Finland’s own business is to a very large extent connected to other European countries, whether through suppliers, subcontractors or clients.

Mäkinen: the will to growth is lacking from Europe

European leaders are pondering how to solve the companies’ loan issue.

The European Commission has prepared loans through the European Investment Bank, which would alleviate the financing troubles of SMEs. The German state’s development bank KfW has negotiated hundreds of millions of euros in loans with its Spanish equivalent ICO.

It is still necessary to use these euros wisely. EK’s Mäkinen is worried that the loans will be used for re-financing rather than investments. He sees that this is a problem in the whole of Europe.

– The role of SMEs in employment creation, as investors and as engines of growth is at risk if companies are not willing to invest. Are there willingness for growth, enthusiasm and business visions in Europe?  They seem to be missing at the moment, Mäkinen sighs.

I find this a bit strange. Of course European businesses are willing to grow. It is just that there is a lack of demand, which also resonates with the large uncertainty over the European economy, availability of financing etc. And beyond that, also the world economy doesn’t look so healthy anymore, so any chance of an export-led growth out of the crisis is at the moment very small. I seriously doubt this is an attitude problem – as Puttonen above stated citing the ECB, the major problem is lack of demand.

Vesa Puttonen states that SMEs exist as part of the European economy. Which again does not appear very bright at the moment.

– All the talk, that the euro crisis would be over, is extremely premature daydreaming. Neither the euro crisis nor the banking crisis are over. The turn for the positive is not visible in the near future.

This I fully agree with. It is not nice to be ‘Dr. Doom’ or ‘A Gloomy European Economist’ but as far as I can see the Eurocrisis is far from over.

In Brussels on 27 and 28 June at the EU summit the focus is on economic policy. One of the most important things is to evaluate the measures to promote competitiveness, create jobs and increase growth.


More on the banking freeze-up in Finland: the co-operative banks

In the context of yesterday’s post on the banking freeze-up for SMEs in Finland, there is a new article on Tekniikka&Talous, in which the Finnish co-operative banks weigh in on the debate. Finland, like many European countries, has still a fairly strong network of co-operative banks, and the news article can be seen as 1) a ‘we-are-different’ argument or 2) a kind of PR strategy (read: advertisement) for this particular network of co-operative banks. Whichever is the correct interpretation I leave to the reader but here is a rough translation.



The OP-Pohjala Group reassures firms, that stricter regulations on the capital adequacy of banks does not influence the availability of finance for firms. Lately in Finland and Europe there has been a discussion about the increase of financing costs for SMEs, which is feared to weaken economic growth.

– The capital adequacy of the OP-Pohjala Group is strong and enables the financing and exploration of projects in the normal way regardless of the economic sector, ensures Finance and Card Activity director Jari Tirkkonen.

He adds that loan margins have increased due to the rise in costs of fundraising and tightened regulation.

Regardless of the increased loan margins the general low level of interest rates and similarly the low cost of business finance have on the other hand not increased investments but an opposite development has happened: the amount of investments, which support growth and employment, has clearly declined.

– This reflects the economic activity at the moment very well. It also shows in the volume of the business credit in banks. Already in the beginning of the weaking of the economy we advised clients to prepare for a postponed recovery as well as limits to working capital and other funding.

If a long slow-growth phase continues for example 2-3 years, especially firms that did not benefit from the short recovery in 2009 may get into difficulties, according to Tirkkonen.

The situation differs by economic sector

The situation differs greatly by economic sector and by company, but in general Finnish companies’ capital adequacy and liquidity are still in good shape, according to Tirkkonen.

– For example the order portfolios of principal subcontracted workshops have not decreased as much as one could expect, so it is not expected to see a big wave of bankruptcies through this route.

Tirkkonen emphasises that, regarding the banks’ customers, they work for the long term, both concerning working capital and investment capital.

– Businesses have kept in contact more than previously, due the economic situation.

The equity rate and capital adequacy of firms are always important in granting finance, whether it is acquired through previous profits or capital investments.



Banking freeze-up: Vicious circle for Finnish SMEs

Update – here is a reaction by a representative of a co-operative banking group on the apparent banking freeze.

I have occasionally reported on the state of the Finnish economy in relation to the Eurocrisis, and e.g. last week I posted a link on new forecasts by the Bank of Finland that are very grim. Also some Finnish key economists have very divergent views on how they propose Finland gets out of the current recession (which is the third since 2008). But they agree on one thing: the Finnish economy is looking bad. So far, the economy has been mainly supported by domestic demand, but I have seen news items that indicate this is something from the past as well.

The weekly ‘technology and economy’ journal Tekniikka&Talous quite often has much more significant news on the Finnish economy that e.g. Helsingin Sanomat, the main Finnish daily newspaper. Especially its frequent updates are a feature that is extremely valuable. Today T&T has a very important piece regarding small- and medium sized enterprises. It is based around data on bankruptcies, bank functioning (including Basel III), loan guarantees and other issues regarding the functioning of SMEs. The interviewed persons work for Fennia, a large Finnish insurer and ETLA, an important economic research institute. [correction applied]

In this post, I don’t want to go into the reasons why Finland used to be one of the most competitve countries in the world and now it is sinking fast. But I do say that, agreeing with the reasoning on this Finnish economics-blog, it was a cardinal mistake for Finland to join the euro. And perhaps the hard line Finland’s goverment has taken in recent years regarding the Eurocrisis will bite it in the behind soon.

One knows that the situation is bad when a news article opens with the sentence: “The ability or will of banks to finance is at its lowest since the recession of the early 1990s.” I recommend this book for insight on the crisis, which was a kind of Greek crisis but fortunately Finland was not shackled in the EMU then. The article mentions that SMEs are not able to secure finance from banks and therefore they look elsewhere – e.g. to other financiers or capital investors, but often in vain. The author states that the lack of economic growth burdens companies, and that this year is going to be (even) tighter than last year. But the big problem is still finance, because it limits new investments as well as working capital.

The vice CEO of Fennia Eero Eriksson posits that this Autumn looks bad regarding repayment problems and bankruptcies. Until the beginning of the year, the amount of bankruptcies was on the same level as the same period last year, but April was very bad all of a sudden.The research director of ETLA Markku Kotilainen states that it is not likely that the number of bankruptcies will explode, if the ‘expected international recovery will happen early enough.’ To this I would say – the forecasts by IMF and in particular the European Commission have not been exactly reliable. In most cases, especially regarding the EC, they have been wildly optimistic. Of course, stranger things can happen, but I for one am not too optimistic about a timely recovery in Europe.
Kotilainen also repeats something some economists here mentioned: that wage moderation is needed. ETLA is indepentent but generally seen as pro-business.

The most important worry though is the financing system in Finland, to this Eriksson says that they just don’t work (or work properly) and that also government involvement should be considered to get things afloat again. He calls this a vicious circle, because with undersized own capital it is not possible to get loans to even sensible investments.

In this process, it is possible to see the effects of new rules on bank capitalization – according to Kotilainen banks try to compensate for the costs of these measures by raising marginals, and these in turn influence both the availabilty of loans for SMEs and the costs of loans.

Regarding non-bank finance the article mentions the Finnish state-owned specialized financing company Finnvera, TEKES, business-angels and tax decreases (starting next year) as possibilities for SMEs to survive and get financing elsewhere.

But although there are possibilities to get financing elsewhere, the will to invest has decreased since the beginning of this year, the article states. And in those cases firms want to invest, risk capital is unlikely to be found for SMEs. Eriksson states that banks do not want to take any risks at the moment. Although this should be analysed in a broader context, this freeze-up of the Finnish capital market for firms is not a good sign. Basel III is also said to reduce the amount of risk banks are willing (or allowed) to take on.

Eriksson states something very important in relation to the whole Eurocrisis: “The stimulating monetary policy of the central banks doesn’t show in the SME-sector, because the price of money is high for them: pricing by banks is based on risk. Banks are exceptionally over-prudent in risk assessment right now.” And: “Regardless of the record low interest rates in relation to the central banks’ monetary stimulus, the price of money/financing is too steep for SMEs, or financing is simply not available.” He continues to state that the guarantee loan instruments of various Finnish institutions such as Finnvera should be used.

There you have it. I have written a lot about the state of the Finnish economy, which is worse that somehow is acknowledged in the European policy discussions (as also is the case with the Netherlands). I have not previously written about banking issues, because I don’t know enough about that. I do know that the government continues to assure that Finnish banks are in a good shape – this may be, but that is not now where the problem is. So, similarly to what is written e.g. here, also in Finland the money supply is too tight, regardless of what is said about the risks of inflation etc. I do hope, for the sake of all those people who work in SMEs (and not only in Finland) that some kind of solution can be engineered soon.