Europe in limbo
Home and dry
Europe’s weaker economies are in the grip of a worsening credit crunch
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).
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.
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.