Global credit tightens

From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.

The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

The deteriorating situation in the eurozone prompted the Organisation for Economic Cooperation and Development recently to project that the US economy would grow at a 2 percent rate next year, down from a forecast of 3.1 per cent growth in May.

It also lowered its economic outlook for Europe and the rest of the world, and a credit contraction could exacerbate the slowdown. In addition, Moody’s Investors Service, the credit-rating agency, on Monday raised the specter of mass downgrades of European government debt if a forceful resolution to the escalating crisis is not found.

Investors have begun to treat Europe’s big banks as the weak link in the global financial chain because of their huge holdings of bonds issued by debt-laden governments like Italy and Spain. US money market funds have been closing the spigot of money they lend to European banks, forcing them to tighten lending standards and, in some cases, even withdraw financing from longtime customers.

To make matters worse, European institutions are simultaneously under pressure from their regulators to hold more capital for each dollar they lend, prompting many banks to reduce their portfolio of loans. Analysts say Europe’s banks could shed up to 3 trillion euros of loans over the next few years, equal to about 10 percent of their total assets.

“If your largest banks aren’t able to provide credit, it hinders economic development and contributes to a recession,” said JPMorgan Chase fixed-income research analyst Alex Roever. Air France, for example, typically relied on French banks like BNP Paribas and Societe Gener ale to help it finance about 15 per cent of what it spends to purchase airplanes. Now those banks are retreating from making airline loans to save capital.

As an alternative, Air France officials say that they started developing closer ties with Chinese and Japanese banks, which have not faced the same pressure as their eurozone counterparts, to help pick up the slack. Executives of Emirates Airlines, based in Dubai, are turning to the Islamic financing system, as well as to lenders in emerging markets, to help pay for its new fleet as some of the European banks shut off lending. Emirates has ordered 243 aircraft, worth more than $84 billion, from Airbus, Boeing and other aerospace companies.

“We were kind of planning for finance from the European banks,” Emirates President Tim Clark said. “It’s just a bit difficult now.” A failure to secure financing could quickly add up to lost jobs in the United States, Latin America and elsewhere.

Boeing, a major American plane manufacturer, recently warned that a European pullback could affect its business next year. With some European banks out of the picture, “this leaves a difference that must be made up by other sources if airplane deliveries across the industry, already set to increase in 2012, are to occur as planned,” said company spokesman John Kvasnosky.

Embraer, a Brazilian aerospace company, tempered its growth expectations despite experiencing a pickup in commercial and business jet sales in the third quarter.
“This whole situation in Europe again has stalled this recovery process,” said Embraer chief executive Frederico Curado, chief executive of Embraer, in a conference call with investors in early November. “The way we see the world going forward is of a moderate growth.”
It remains to be seen, though, whether even moderate growth can be achieved.
Moody’s cautioned that there was an increased chance that more than one country in the eurozone could default. In spite of that warning, investors put their fears aside and sent stocks up Monday by nearly 3 per cent in New York. Investors remain hesitant about government bond offerings, though.

A tepid auction in Germany last week was particularly unnerving since its economy has long been seen as Europe’s financial bulwark. In Italy, weak demand for bonds pushed yields back above the critical 7 per cent threshold, a level that has prompted other government borrowers to seek bailouts.

Higher interest rates on government debt quickly translate into higher borrowing costs for local companies and consumers in need of loans. Meanwhile, European banks’ own borrowing costs are rising because the dollars they need to lend are in short supply. So the banks are tightening their lending standards, squeezing businesses like airlines, shipping companies and exporters of oil, steel and food staples, industries that are critical to the health of the world economy.

“The strains and stress are increasing,” said Goldman Sachs European economist Dirk Schumacher. “Funding conditions for corporations will get tougher going forward.” One sign of this strain is that European lenders are quietly withdrawing from big infrastructure projects, like power plants and water developments, especially in the Middle East. Just this month, the $10 billion Barzan gas project in Qatar secured financing from 31 lenders, but three of the biggest French banks, BNP Paribas, Societe Generale and Natixis, were notably absent. “These guys are usually very active and this is a material sign that European lenders are holding back,” said Moody’s analyst Khalid Howladar.

Large shipping companies are finding fewer lenders, too. Only a few years ago, Europe’s biggest banks were clamoring to supply credit at very attractive terms. Now, as freight rates collapse amid a global slowdown, those banks are tightening their purse strings. Frontline Ltd., an oil tanker giant in financial straits, said last week that it had lined up financing for only two of the seven vessels it planned to build.

The economic fallout from a global decline in shipbuilding affects not only the workers at the dry docks but also hundreds of businesses that supply parts and raw material to the industry. In Germany, for example, more than 5,000 people have lost their jobs in major ports like Hamburg, Kiel and Rostock, according to a local trade group. Smaller companies are also struggling to secure credit. In Ireland, a survey by the local Small and Medium Enterprises Association found that 58 per cent of companies that had approached banks for loans were ultimately turned down.

“We have many, many businesses that are viable but the banks are not lending to them in the short term,” said Mark Fielding, its chief executive.

In Eastern Europe, where Western European banks have retrenched, leaders are sounding alarms. Romanian President Traian Basescu accused Austrian regulators of “choking the Romanian economy” after they ordered banks to limit lending outside its borders.

In Hungary, new construction for shopping centers and other commercial developments has come to a halt. Nora Demeter, an architect in Budapest, said her 20-member firm had laid off a handful of employees and was likely to make further cuts. “The chance of getting a major project off the ground in this country is virtually over,” Demeter said. She added that “2012 is looking even bleaker.”

Even companies as far away as China are being hurt by Europe’s economic slowdown as many of them have stopped accepting letters of credit from Greek banks, forcing Greek retailers to put down cash deposits of around 30 per cent for new orders, a move that will worsen the decline.