Uncertainty in the global economy has been elevated following trade tariff disputes, economic policy changes, and geopolitical risks. This column examines the impact of uncertainty on non-financial corporate borrowing in the euro area, distinguishing the impact of various sources of uncertainty. It finds that increased uncertainty decreases non-financial corporate credit growth, particularly loan growth. While domestic uncertainty shocks tend to shorten loan maturities, financial market volatility shocks do not, and both lead to longer bond-debt maturities.
Recently, uncertainty has been elevated due to trade tariff disputes, economic policy changes, and geopolitical risks. In the last few quarters, various global and local sources – including European economic policy and global trade tariff conflicts – have contributed to exceptionally high uncertainty, each possibly influencing corporate financing decisions through different channels. To capture the multifaceted nature of uncertainty, we consider several measures, such as the Financial Market Volatility Index (VIX), the World Uncertainty Index, European Commission Business Survey’s uncertainty measure, Economic Policy Uncertainty, Energy-related Uncertainty, Trade Policy Uncertainty, and the Geopolitical Risk Index (Figure 1). Some of the indexes move together at times but are, in general, not strongly correlated. For instance, world uncertainty spiked during the 9/11 attacks, the euro debt crisis, and the COVID-19 pandemic, while financial market volatility surged during the global crisis. Uncertainty from the European Commission business survey was elevated in the financial crisis and the pandemic, whereas geopolitical risks were high at the turn of the century and following Russia’s full-scale invasion of Ukraine in 2022. Trade policy uncertainty was somewhat elevated during 2018-2019, an episode characterised by the renegotiation of trade agreements between the US and other countries as well as changes in tariffs, and surged in the first half of 2025 with the inauguration of the new US administration.
Figure 1 Selected measures of uncertainty
Previous research suggests that, in times of high uncertainty, firms reduce investment and its associated long-term borrowing. Factors like policy and political uncertainty, geopolitical risks, and financial market volatility can cause precautionary delays in investment, dampen business confidence, and tighten credit conditions (e.g. Gulen and Ion 2016, Baker et al. 2016, Caldara and Iacoviello 2022, Kim et al. 2023). Existing research indicates that, as firms delay investments, their credit demand decreases, particularly for longer maturities, as investments typically require long-term financing that firms forgo when delaying such projects. Firms may restructure their debt towards shorter maturities to manage risk and maintain financial flexibility, even though the results are nuanced (Datta et al. 2019, Li 2022). For instance, Datta et al. (2019) highlight that not all firms shorten debt maturities in response to elevated policy uncertainty. Larger, high-growth firms tend to increase their debt maturity, while financially constrained firms and firms more exposed to the domicile political environment move towards short-term debt. Additionally, uncertainty impacts corporate bonds and loans differently, increasing corporate bond spreads without affecting bank loan spreads (e.g. Grimme 2022, Waisman et al. 2015).
Over the past two decades, euro area corporate credit growth has shown distinct trends for loans and bonds shaped by economic events and uncertainty, with bond credit increasing when financial conditions tighten. Before the global crisis, loan growth outpaced bond credit growth. With the credit crunch during the crisis, loan growth decreased substantially, while bond credit increased as firms turned to capital markets for funding (Figure 2). Bond and loan credit growth also diverged during and after the sovereign debt crisis, with bond credit rising and loan growth flatlining around zero. Since the COVID-19 pandemic, trends have been more aligned (Figure 2, Panel A), as support measures and liquidity provisions have allowed firms to maintain access to both markets.
Corporate credit has displayed a shift to longer maturities in times of crisis, although driven by distinct dynamics in bond and loan markets. During the global crisis and the COVID-19 pandemic, long-term bond issuance increased as investors sought safety, while short-term bond issuance declined (Figure 2, Panel B). In the case of loans, both short- and long-term loan growth fell during the global crisis, but short-term loans declined more sharply. In the COVID-19 pandemic, short-term loans decreased but long-term loan growth increased, as policy interventions prevented a credit crunch and helped firms maintain access to loans. 1 These observed shifts towards long-term debt during the global crisis and COVID-19 pandemic might reflect firms’ efforts to mitigate refinancing and credit risks by lengthening debt maturity for more stable funding in uncertain times (e.g. Diamond 1991). Additionally, investors’ loss aversion and lenders’ cautious stance may have made long-term debt more attractive, as it offers a more predictable income stream and is less susceptible to immediate economic fluctuations and liquidity risks compared to short-term debt.
Figure 2 Euro area non-financial corporate credit growth
To inform our understanding of the current uncertainty episode, we conduct an empirical exercise and show that the impact of uncertainty on non-financial corporate (NFC) borrowing varies with the type of uncertainty, with economic policy uncertainty, financial market volatility, and European Commission business survey uncertainty significantly reducing euro area credit growth. By estimating impulse response functions of euro area NFC credit growth to uncertainty shocks, we leverage historical patterns to infer how firms generally respond to various uncertainty types and what this implies for current and future periods of heightened uncertainty. Table 1 summarises the key findings, showing for each uncertainty metric whether a shock has a positive, negative or insignificant impact on credit growth across debt instruments and maturities. A financial market volatility shock negatively impacts NFC credit growth, while a world uncertainty shock has a negligible impact overall, but similarly to financial market volatility positively affects long-term bond credit. Economic policy uncertainty and European Commission business survey uncertainty reduce corporate borrowing, particularly long-term loan credit, possibly reflecting that policy uncertainty is particularly relevant in firms’ decisions to commit to long-term investments. Simultaneously, increased perceived risks and heightened uncertainty may lead banks to tighten lending standards and reduce the supply of credit. Geopolitical risks decrease bond credit but have almost no effect on loan credit, indicating that geopolitical tensions primarily affect confidence in bonds. Global energy uncertainty and trade policy uncertainty have no significant impact on NFC credit growth. 2
Table 1 The impact of uncertainty shocks on euro area non-financial corporate credit growth
Focusing on financial market volatility shocks shows that the negative impact on loan credit is larger and more persistent than the positive impact on bond credit, and that initially short-term loans contract more than long-term loans. After a shock to financial market volatility (Figure 3), long-term bond credit growth increases, peaking at three to four quarters post-shock, before dissipating with a negligible cumulative effect. The impact on loans is more persistent with loan growth consistently lower by 0.5 percentage points in quarters four-eight, possibly reflecting tighter lending standards. While both short- and long-term loan growth decline after the shock, the reaction is more delayed for long-term loans, implying an initial shift to longer maturities. Total credit growth decreases by about 0.35 percentage points over two years as the increase in long-term bond credit is outweighed by the decline in loan growth across maturities. This suggests that firms with limited access to the bond market, like SMEs, are more vulnerable to financial market volatility shocks.
Figure 3 The impact of a volatility index shock on euro area corporate credit growth
Non-financial corporate credit also decreases after domestic uncertainty shocks, but loans react differently when compared to financial volatility shocks, with shorter maturities increasing their share, highlighting the heterogeneous impact of uncertainty shocks. Following a domestic uncertainty shock, like those related to economic policy uncertainty or European Commission business survey uncertainty, total credit growth declines, suggesting that firms also defer borrowing in response to this type of uncertainty. Bond-debt maturities lengthen in reaction to higher domestic uncertainty and in line with what happens after financial market volatility shocks. However, in the case of loans and in contrast to financial market volatility shocks, domestic uncertainty shocks lead to shorter loan maturities, illustrating the varying impacts of different uncertainty types on debt instruments. The stylised models examine uncertainty measures in isolation, even though different measures can be elevated simultaneously. This may explain why during both the pandemic and the global crisis, although representing different types of uncertainty, a shift to long-term loans was observed.
Even if shocks reverberate in different ways, the negative impact of uncertainty on corporate borrowing suggests downside risks for the outlook of euro area corporate credit growth and investment. Corporate borrowing is sensitive to uncertainty shocks, with firms reducing borrowing in response to increased uncertainty and the impact persists over eight quarters after the shock. The type of uncertainty also impacts the choice of the debt instrument and debt maturity, indicating a broader restructuring of corporate financing strategies. 3 The current high readings across uncertainty measures such as geopolitical risks or trade policy uncertainty suggest that the risks for a recovery in corporate borrowing are tilted to the downside. Precautionary delays in borrowing and investment may foreshadow weak output growth highlighting the need for stable policy environments to encourage corporate credit and investment.
Source : VOXeu
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