New research shows that the vulnerability of the euro area to a “sudden stop” worsened the crisis by further constraining the fiscal reaction of governments during the downturn.14 While such options to increase equity funding are being developed, a strategy that can improve debt dynamics for all firms’ is to raise “implied equity” – the outlook for future income.
If firms expect higher income, it improves their debt-to-income ratios and debt service capacity, which in turn creates space for new investment.15 In this sense, raising both the level and trend of potential growth is an integral part of recapitalising European firms, and indeed of the economy as whole.