Euro Banks Follow US Lead with Post-Bailout Lending Freeze

The Greek debt crisis and its ripple effects across Europe are crimping credit,

especially for midsize and smaller companies and definitely those in countries perceived as riskier —

starting with Greece but also including Portugal, Spain and others on the periphery.

That means the lending freeze instituted by TBTF banks & speculators posing as investors could be most severe in the countries most in need of economic growth.

The Greek debt crisis and its ripple effects across Europe are crimping credit,

especially for midsize and smaller companies and definitely those in countries perceived as riskier —

starting with Greece but also including Portugal, Spain and others on the periphery.

That means the lending freeze instituted by TBTF banks & speculators posing as investors could be most severe in the countries most in need of economic growth.

In fact, the freeze is dividing up companies into credit-haves and credit-have-nots, according to this important and extensive article in the New York Times.

The haves include companies like SAP, the German maker of corporate software.

In April, SAP issued €500 million, or $618 million, in corporate bonds with an interest rate of 2.5 percent,

which compares favorably with German government bunds, the gold standard in the European debt market.

The have-nots include companies like Vostex, a family-owned textile company with 10 employees located in the Athens suburb of Peristeri.

“The banks are getting stingy,” griped Harry Vostantzoglou, chief executive of Vostex.

He said that Vostex was profitable and that he expected it to survive even without the local banks.

Still, he said he might postpone international expansion plans.

As at Vostex, lack of credit can translate into reduced investment and job creation.

If the conscious freeze persists, it could slow European growth, hold down tax receipts,

and make it that much harder for such countries as Greece, Portugal and Spain to get their debts under control.

European banks, still recovering from the financial crisis, had tightened their standards for borrowers even before sovereign debt jitters struck.

Lending fell at an annual rate of more than 2 percent in the first quarter of 2010, according to European Central Bank data.

Now there are signs the availability of credit to business could worsen further as banks and investors demand higher risk premiums.

The situation is especially dire for companies in the highly indebted countries,

where rates for business loans tend to reflect the risk premium that the local government is paying.

Banks in Greece have also been hit hard by their government’s debt crisis and the economic downturn, making it tougher for them to lend.

“There is no longer a single cost of capital for the euro zone as a whole,” Stephen King, global chief economist at HSBC, wrote Monday in a note.

“It appears that nationality is increasingly having an impact on borrowing costs. So much for the single market” in the zone.

Corporate borrowing in the bond market is also in a sharp downturn.

New bond issues by European companies plunged in April, to $28.5 billion from $58.3 billion in March, according to data from Dealogic.

And so far in May, new issues have totaled about $5 billion.

“Greece’s debt crisis could cause credit spreads to widen and borrowing costs to rise,

prompting issuers to hold off raising funds until market conditions improve,” Christine Li, European economist at Moody’s, the ratings agency, wrote in a note.

Credit spreads represent the difference in interest that borrowers need to pay on securities perceived as risky and those deemed safe.

The bond market sometimes seems to be singling out companies in the most indebted countries.

The cost of insuring bonds issued by Telefónica, the telecommunications provider based in Madrid, nearly doubled from mid-April to early May,

even though the company earns two-thirds of its revenue outside Spain.

“The perception is that if Madrid is in trouble so is Telefónica,” said Karsten Rosenkilde, a senior corporate bond fund manager at DWS, the fund management arm of Deutsche Bank in Frankfurt.

“The Mediterranean corporates were the first to suffer and have really struggled to recover.”

It may not be fair, but that is often the way the lending market works.

In many cases credit rating agencies follow a “sovereign ceiling” practice, under which private borrowers cannot obtain a better rating than their home country’s debt, according to a 2006 study by economists at the Federal Reserve.

After sovereign debt crises or defaults, the study found, credit tends to become more expensive for all domestic businesses, which then cut their borrowing.

The twist in this sovereign debt crisis is that risk premiums remain low in the European countries that investors perceive as safe.

The Dutch brewer Heineken, for example, last week raised $725 million from institutional investors at 4.5 percent over eight years.

It then swapped the debt into euros with an even lower interest rate of 3.9 percent …

Hardest hit will probably be smaller companies in the Mediterranean countries that are reliant on local banks for credit.

Companies in Eastern Europe, still recovering from a sharp downturn in 2008, may also suffer from increased risk aversion by banks.

“Banks are now much more cautious,” said Thomas Laursen, the World Bank’s country manager for Poland and the Baltic States.

“Financing conditions for the private sector are now much more difficult, and this has affected investments.”…

The European Central Bank has sought to keep credit flowing by allowing banks to borrow from it at 1 percent interest.

As collateral the E.C.B. accepts bonds, even Greek bonds, allowing banks to convert this damaged debt to cash.

The E.C.B. president Jean-Claude Trichet often reminds banks that he expects them to lend this cheap money to businesses to fuel growth …

[EW: Good luck on that one … we’ve seen what US banks do what “zero interest rate” money:

invest it in the currencies / bonds of countries offering higher interest rates, and then cashing in on the diference …

Given how Euro banks are following the examples of the US banks, we highly doubt they’ll be doing much lending with this cheap money,

but playing with it to fatten their profit margins 😉 ]

In fact, some companies are still getting credit despite the sovereign debt crisis.

For example, Sonae, a developer of shopping centers and the largest private employer in Portugal,

said it still planned to open 45 stores in Spain this year despite a slump in consumer spending.

“Credit is not so easy to get as it was in the past,” the company said in a statement in answer to questions.

“However, Sonae isn’t having problems in financing its activities.”

Over all, though, a climate of tighter credit would seem to favor companies in Germany, France or other countries that still enjoy the trust of bond buyers.

Mr. Rosenkilde, the fund manager at DWS, predicted that the corporate bond market could bounce back quickly

if investors became more confident about Europe’s ability to overcome the sovereign debt crisis.

A more robust bond market would also be encouraging news for small-business lending.

Banks often issue bonds to raise money that they then lend to companies.

Martin Fischedick, a member of the board of the Corporate Banking division of Commerzbank in Frankfurt,

said that “conditions on the money and bond markets play an important role in the ability of banks to lend to companies.”

At the beginning of May “there were severe tensions in these markets because of the E.U. debt crisis,” Mr. Fischedick said in an e-mail message.

But he said a $1 trillion rescue package eased the tensions and bank lending was not affected.

Until the credit rebound comes, Tadeusz Nowicki, a Warsaw plastics maker, said he would have to curtail investment.

Banks, he said, “can see our company’s performance, how we repay on time.”

But he added: “I am suffering. I have three or four projects ready but I cannot realize them because of limited access to loans. The banks don’t want to deliver.”