Investors need to commit to state aid

Apr 16, 2020

Investors need to commit to state aid Investing involves risks, which we have experienced in all ferocity over the past weeks. A share price is nothing more than the discounting of all future profits of a company. With a recession unavoidable as a result of the corona pandemic, it is very likely that company profits will be lower and the share price will, therefore, have to go down. This has therefore happened significantly in recent weeks, with the declines being exacerbated by sentiment and fear. Shareholders have therefore had to bleed heavily, but this is not yet enough for Brussels politics.

The EU member states are currently negotiating regulations that would mean that companies that receive state aid to get through the corona crisis would no longer be allowed to pay dividends to shareholders. The European Central Bank has already made this appeal to the financial sector. In addition to cancelling the dividend, the company may not buy back its own shares and may not make takeovers if it receives state aid. Of course, there is something to be said for this. Politicians must be very careful not to create the appearance of unfair competition with companies that do not need state support. Moreover, in order to get through the crisis, companies need to be prudent about their liquidity and the State aid obtained through recapitalisation should not be allowed to drain away into dividends, share buy-ins or acquisitions. The fact that this can happen has previously been seen in the various Quantitative Easing programmes of the central banks. Here, too, the intention was that the credit space offered to banks would flow to society in order to create inflation. But most of the created funds were eventually invested in the financial markets.

According to Commissioner Vestager, companies can be helped through the crisis by having a member state buy newly issued preference shares in the company. The member state can also purchase bonds convertible into shares. Brussels states that state aid can only be given this year. Companies that were already in trouble in 2019 will not be able to call on it. From 1 January 2023 at the latest, Member States must start phasing out state aid. Businesses should be encouraged to do this by slowly increasing the (interest) compensation to be paid for the state aid or by laying down in the conditions that the interest in the company will automatically grow.

What about Brexit?

Politicians and investors currently have something different on their minds than the Brexit. However, this concern of the ‘past’, which regularly graced the front pages, is back on the agenda. London and Brussels are talking again. The United Kingdom and the European Union have planned new (telephone) rounds of talks in order to resume negotiations on their future trading relationship, which were delayed by the pandemic. For the time being, there should be an agreement on 31 December next. The first round of talks is scheduled for 20 April.

However, there is a growing demand in the United Kingdom to postpone the date, even among those who have always argued strongly in favour of a Brexit. British business is already struggling enough to get through the current corona crisis and cannot use the additional uncertainty of a new trade agreement. Certainly a ‘no-deal’ scenario, which is still possible, will hit the British economy extra hard now, entrepreneurs expect. Even pro-Brexit Conservative politicians are told that a postponement of the 31 December date would only make sense. Not to stop the Brexit process, as the European Union has already been abandoned, but to give the British economy some air after the corona crisis. But for the time being ‘Downing Street’ does not want to know anything about a postponement and remains the official statement of the British government that the talks will be resumed in order to finally be liberated from the European Union on 1 January next. Should the British still change their mind, they have until June to ask the European Union to postpone the deadline.

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Articles authored by Robert Jan Teuwissen

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