IGTA Journal - Winter 2020/2021

29/01/2021 The sovereign-bank-corporate nexus – virtuous or vicious? https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210128~8f5dc86601.en.html 2/13 Sources: Eurostat and ECB calculations. Notes: The composite measure is based on a broad set of indicators along five dimensions: debt service capacity (measured by the interest coverage ratio, corporate savings and revenue generation); leverage/indebtedness (debt-to- equity, net debt-to-EBIT and gross debt-to-income ratios); financing/rollover (ratio of short-term debt to long-term debt; quick ratio (defined as current financial assets divided by current liabilities); overall cost of debt financing and credit impulse (defined as the change in new credit issued as a percentage of GDP)); profitability (return on assets, profit margin and market-to-book value ratio) and activity (sales growth, trade creditors ratio and change in accounts receivable turnover). Except for the overall cost of debt financing and GDP, all indicators are based on data from the ECB’s quarterly sector accounts. The overall cost of debt financing indicator is calculated as a weighted average of the costs of bank borrowing and market-based debt, based on their respective amounts outstanding. In response to these developments, governments swiftly launched broad-based measures to support households and firms, including job retention schemes, direct transfers, tax cuts and deferrals, as well as loan guarantees ( Chart 2 ). At the same time, the ECB supported bank lending to firms by providing ample liquidity at favourable conditions, while prudential authorities took comprehensive supervisory relief measures. The decisive policy response allowed firms to draw down their credit lines in order to finance their working capital, leading to an unprecedented increase in bank lending in the spring of 2020. Chart 2 Loan guarantees and remaining envelopes relative to sovereign debt in 2020 in selected euro area countries Percentages of GDP and percentages of outstanding sovereign debt IGTA eJournal | Winter 2020/21 | 7