How does coronavirus impact capital markets? Can bond markets function in the face of this economic crisis? Find out from our capital markets expert

Our lives have changed with the coronavirus crisis. But have they changed forever? In Does This Change Everything? European Investment Bank experts examine the implications of the COVID-19 crisis for sectors from education and digitalisation to urban mobility and medicineand for your everyday life.

To find out what coronavirus means for the capital markets, we spoke to Eila Kreivi, director of capital markets at the European Investment Bank, the EU Bank.

Read Does This Change Everything? from the European Investment Bank, the EU bank. Subscribe to the podcast on iTunesAcastPlayerFM and Spotify 

Does the coronavirus change the future of the capital markets?

Right now, it’s hard to see very far in the future. But I think it may bring on some changes—some of them are technical, some are more fundamental. I would say that the financial markets have gone through quite a few crises during the last 12 years, so it’s already rather a tested environment. So I wouldn’t expect it to change totally. But I think there will be some changes, yes.

What kind of new approaches might be needed in the capital markets to cope with this situation?

One thing we have seen over the last years, even as we came out of the crisis in Europe, central banks have continued to provide liquidity to the markets—we were just talking about that coming to an end when this happened and then we saw that we need to have much, much more of it. That continues to be the case.

The fear was that central banks don’t have any more tools in their toolpacks, if a next crisis comes. Now we have seen that governments have done what was asked of them in many cases before. Governments are starting to loosen the purse strings, i.e. starting to say that they will borrow more because they will need to support the economy.

This crisis is different from all the other crises, in the sense that, before, it was the finance area or the government area or one area that was in crisis. Now this is the whole economy, everything—private, public, governments, banks, corporates, whatever—so this is what is different in this crisis. It goes through everything, and we could not do this without governments stepping in. That’s very clear.

One thing that’s talked about in Europe is the mutualisation of debt. Will this happen in this crisis? I don’t know. The jury is still out and you hear different comments every day. I think that in some form or shape it may happen. It doesn’t need to mean that we will get the eurobonds, we may get something else. But I think that mutualisation is even a part of the plan that the EIB is proposing, to a certain extent—to a limited extent. So I think we will see probably a little more of that than we used to see.

In technical terms, we will see a huge amount of issuance coming from the governments, obviously, because they will need to borrow more in order to keep the economy up and running, to keep people’s employment allocations paid, to support corporates, to support banks and just about everybody. That will have a big impact in the future on the taxpayers, I’m afraid, because when governments borrow there’s only one way that it will be paid back one day. That’s going to be on the future generations, I’m afraid.

You mentioned borrowing in the bond markets in order to keep the economy running. In late March, the European Investment Bank issued a €3 billion bond, even though market participants were working from home. How did that work?

It worked actually quite well. But I have to say that if you had told me in January, “Shall we test this?” I would have told you, “You are out of your mind. We will not test this.” But when you have no choice you have to do it.

We had tested on our side that this was feasible. All our bankers, our traders, our syndicate managers were at home. Investors were at home. We did not know that everyone would feel comfortable that they had sufficient information, whether they would have their systems working to the extent they needed. We had different time zones—when we do a transaction like this it involves people from quite a few different time zones from Asia to the Americas.

I would never have attempted it like that, had we not been obliged to. I have to say that when it was done and dusted I heaved quite a deep sigh of relief.

In comparison to equity markets, the capital markets are relatively computerised. You don’t have trading floors for bonds. Is it better set up than stock markets for this sort of situation?

I’m not an expert on stock markets, but I think we are quite well set-up for that. All our trading platforms, our communication platforms all work very well on the internet.

However, when you have all of a firm, be it us or a bank or an investment firm, all working remotely it puts a stress on the bandwidth of those systems, in quite a different manner compared to having a couple of people working outside the office. This was one big test, of course. Home wi-fi is not the same as the work connections. All of this can just come at the crucial moment and then cause disruption.

I would say that we are well-prepared but still nothing was taken for granted.

What kind of effect might this situation in the capital markets have for everyday life for citizens? Or for financing for municipalities, for regions, and even corporations?

I think for the private citizens, they don’t see too much or feel too much what is going on in the financial markets, unless there are huge troubles, which they do feel at their end, with maybe a little bit of a delay.

So far corporates and municipalities have seen, for example, that banks are taking into account that people may not have the usual cash flow that they have normally and so they can grant a delay in servicing your debt or pause it for the time being. Authorities have said they will look at this leniently. They are not going to force banks to put their whole portfolio into non-performing if they miss a couple of payments because of this virus pandemic. Everybody has played their part. So I think at least for the bigger corporates and municipalities, it probably has been better than they might have feared.

Where this does really hit hard is the SMEs and the more informal sector where people work independently, because they tend to fall between the cracks here. This is where one has to be paying very much attention that these people do not fall off the grid.

In the last few years we have been highlighting sustainable finance, in particular the environment. We talk about ESG, which is E for environment, S for social and G for governance. This crisis has brought a spotlight onto the second letter, the S. Companies which are now seen treating their clients or employees badly because of this crisis will suffer reputational risk, and one already sees signs of it This area is where the EIB profiles very strongly. We try to bring this message to everybody else, to give the market some information and guidelines on how to do things. This is an additional feature that we will see more of going forward.

You mentioned a little bit about how the European Investment Bank is going to be helping to boost the economy. With the capital markets, how important do you think it is that an institution like the European Investment Bank comes in, does a €3 billion bond and everything goes smoothly—as a sign that things can function more or less normally?

I think it is important because somebody has to do it sooner or later, to show the market that this is feasible. We are well-placed to do this, because we are not sombody’s domestic institution. When you are, you tend to get the domestic support that keeps you afloat. We don’t have that, so if we can do it that means that lots of other people can do it.

In that sense, it was an important sign and certainly when I posted this on my LinkedIn I got a huge number of comments and viewings on the post when I said we had actually done this and thanked everybody for participating in such difficult circumstances. It is important to just dare to take the step. You can do small transactions that are not so visible when things go wrong. But when you do the big transactions and something goes wrong, everybody will know about. In that sense, it was a rather courageous thing to do.

I think we can all agree that €3 billion is a big transaction. Thank you, Eila.

Read Does This Change Everything? from the European Investment Bank, the EU bank. Subscribe to the podcast on iTunesAcast and Spotify.