💾 Archived View for gmi.noulin.net › mobileNews › 3995.gmi captured on 2023-12-28 at 19:33:15. Gemini links have been rewritten to link to archived content

View Raw

More Information

⬅️ Previous capture (2023-01-29)

➡️ Next capture (2024-05-10)

-=-=-=-=-=-=-

Europe s weaker economies are in the grip of a worsening credit crunch

2012-05-25 08:12:03

Europe in limbo - Home and dry

May 26th 2012 | London, Madrid and Rome | from the print edition

THE joke recounted by the boss of a large Italian bank is an old one, but it

captures the moment. Two hikers are picnicking when a bear appears. When one

laces up his boots to run, his friend scoffs that he can t outrun a bear. The

shod hiker retorts that it is not the bear he needs to outrun, merely his

fellow hiker. We re sitting at the picnic with our boots still on, says the

bank boss.

As policymakers and pundits try to work out the effects of a Greek exit, banks

and investors have already been taking precautions. One course of action has

been to pull money out of more fragile markets. Never mind the weakest

economies like Greece, Ireland and Portugal; Spain and Italy have also lost

foreign bank deposits of about 45 billion ($56 billion) and 100 billion

respectively from their peaks. Add in things like sales of government bonds by

foreigners (see chart 1), and capital flight is probably equal to about 10% of

GDP in those countries, say Citigroup analysts. Such outflows are hard to stop.

The European Central Bank (ECB) has filled this funding gap by providing

liquidity to the banks. But that has in turn reinforced the second

precautionary tactic: matching assets and liabilities within countries as much

as possible. It is a common refrain from bankers that the euro area no longer

functions as a single financial market, although that has the paradoxical

advantage of making a break-up less destructive. Banks have used ECB loans to

borrow from the national central banks of the countries in which they have

assets; that should mean that both sides of the balance-sheet would get

redenominated in the event of a euro exit.

Much of that ECB liquidity is meant to find its way into the real economy, of

course. But the third precautionary technique, for both lenders and borrowers,

is to hang fire while uncertainty is so high. The Economist has compiled a

credit-crunch index, comprising a number of measures on everything from bank

lending to the cost of buying insurance against default for banks, firms and

sovereigns in the euro zone. A single index disguises big differences between

weaker and stronger states, but it shows that credit is crunchier now than it

was at the height of the banking crisis in 2008 (see chart 2).

Much economic activity is being strangled as a result. In Spain firms have put

bond issues and asset sales on hold. Volatility makes it almost impossible to

value an asset, bankers say. The Catalan government failed to sell 26 buildings

in Barcelona earlier this year for about 450m because one of the bidders

wanted to introduce a clause that said rents would be paid in dollars in the

event of a euro break-up; the other bidder pulled out because it had been told

by headquarters to hold off on deals in southern Europe.

The number of Spanish companies filing for bankruptcy climbed by 21.5% in the

first quarter. Nearly a third of these were in the property or construction

industries, but the rot is spreading. Alestis, an aeronautical supplier to

aircraft manufacturers, filed for bankruptcy earlier this month after failing

to reach an agreement with banks to refinance its debts.

The sound of credit crunching can also be heard next door in Portugal, where

loans to non-financial companies fell by 5% in the first quarter compared with

the same period last year, and credit to households by 3.6%. One of the

conditions of the country s bail-out programme is that banks should reduce

their total loans to 120% of assets. The quickest way to do that is to avoid

making loans.

Conditions are little better in Italy. The province of Varese, near Milan, is a

manufacturing heartland: its factories make plastics, textiles and a range of

engineering products. Once firms there griped about poor infrastructure and red

tape; now the credit squeeze is their main complaint. The local bosses

association says that 40% of firms were hit by lowered borrowing ceilings

between January and March, and 15% were told to pay back loans. Banks turned

down 45% of requests for new funding.

Those loans that are extended carry hefty interest rates, in part because

higher sovereign-borrowing costs have a knock-on effect on banks funding

costs. Differences in sovereign rates can be self-reinforcing, especially when

German firms across the border are rivals. A marginal northern Italian company

competing against an equal company in Bavaria will go bust, says the boss of

one bank. Then the cost of risk goes up and has to be shared by all the other

small companies.

If firms cannot borrow from banks they lengthen payment terms to their

suppliers, exacerbating the credit problem, says Michele Tronconi of Sistema

Moda Italia, a body representing textiles and clothing firms. Fashion is Italy

s second-largest export industry, but no sector has a higher level of

non-performing loans.

This credit squeeze will have tightened since Greece s inconclusive election

this month. That further dents growth prospects: estimates by Now-Casting, a

forecasting firm, suggests that euro-zone GDP will contract by 0.2% in the

second quarter. That in turn risks worsening the debt dynamics of the zone s

peripheral countries at just the wrong time. Policymakers keep trying to buy

time to solve the crisis, but they may be only speeding the end they are trying

to avoid.

from the print edition | Finance and economics