From the TUC

A Credit Crunch in 2012?

12 Dec 2011, by Guest in Economics

Are UK companies facing another credit crunch?

There are worrying signs that they might be. The OECD is now worried that banks, companies and sovereigns face problems refinancing debt that has to be rolled over in 2012.

Last week Citi noted that UK companies are beginning to feel the pinch as credit tightens.

UK companies are also sensitive to the stresses in the banking system stemming from the Euro Zone. Thomas Cook has been a recent example. The company struggled to get funding for its working capital needs. A new bank facility has been recently agreed, but at a higher cost to the company. Our strategists note that a lack of bank financing will probably be an important theme for companies over the next year or so. Companies in the UK may have to increasingly turn to vendor and supplier financing for working capital requirements.

The crisis in the Eurozone is forcing banks to cut back on lending and charge more for credit which, as Cit, notes means firms will have to rely more on ‘vendor and supplier financing’ – i.e. try to stretch their working capital by demanding better terms from their suppliers (longer payments terms, etc).

But the FT reported last week that small and medium UK companies are running down their bank deposits as credit availability remains tight. This is a potentially serious problem – banks aren’t extending enough credit so companies will have to rely on existing reserves – but the slowdown in deposit growth suggest that these reserves might not be adequate.

Against this backdrop the Bank for International Settlements warning that QE was only one quarter as effective as the Bank of England believes is deeply concerning.

If credit is drying up, bank deposits risk being run down and QE isn’t a panacea then UK companies potentially face serious funding problems in 2012 – funding problems which will lead to more job losses, less investment and slower growth.

The government needs to get ‘credit easing’ up and running as quickly as possible.

3 Responses to A Credit Crunch in 2012?

  1. jonathan
    Dec 13th 2011, 5:55 pm

    This has been floating out there for a while and these refunding obligations pose – IMHO – the biggest threat on the horizon.

    But I have no idea what will happen. In a good light, I see the German-French agreement the UK opted out of to be a first step, a groundwork step, for a stronger European mechanism. I mean explicitly that without this agreement, the arguments over “single market” versus European government would cripple responses and potentially would doom the refundings. That’s when I’m in a good mood.

    In this mood, I see the UK’s “veto” as kind of silly because the financial world is changing, Europe is changing and the “safeguards” appear somewhat like clinging to certain “single market” ideas that the single market’s own functioning killed.

    But who knows?

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