Wednesday, February 17, 2010

European Bankruptcies To Come?

The economists at Societe Generale are looking at the yesterday's ECB survey of SME's (small and medium enterprises) access to bank financing. It appears that it is still tough to be small:

In terms of lending needs, while half of SMEs reported an unchanged need for bank loans in H2, a quarter of them reported an increased need. At the same time, about a third of SMEs complained that the level of interest rates on loans had increased despite the fact that policy rates have been constant. Underscoring the continued weakness of demand in the euro area, the most pressing problem faced by SMEs was still finding customers (28% compared to 27% in H1). However 19% of firms reported that access to finance was their most pressing problem, up from 17% in H1. SMEs reported that external financing was required to fund both fixed investment and inventories and working capital.

Banks, of course, see things differently. They claim lending is contracting in the euro area not just because they are pricing risk more appropriately but also because demand from companies, reluctant to invest, has fallen; this latest survey would appear to refute the banks’ claims. It is not hard to envisage a whole raft of SMEs that were viable businesses in the past but who are now screaming out for bridging loans to help see them through the recession. A number of SMEs are fearful of what will happen in the coming months as end of year results are presented to existing creditors. Having survived so far on existing covenants, there is a real risk that loans will not be rolled over, forcing increasing numbers of smaller and medium sized companies into bankruptcy. Clearly, there is a risk that this could yet provoke a second leg to the current downturn.

Click on charts to enlarge, courtesy of Societe Generale.

I will not wonder if at the end of the day some will conclude that the recovery so far has been overestimated. Just because statistics overestimate the performance in the SMEs, especially in the services?

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