Sunday, August 26, 2012

Banks’ continuing damage to Europe

Financial Times
August 26, 2012

The eurozone debt crisis was caused more by private credit excesses – particularly in the banking sector – than by public sector profligacy. The damage that a dysfunctional banking system has inflicted on Europe’s economy is not finished but now the banks are lending too little where earlier they were lending too much.

A new study from the Central Bank of Ireland reveals the difficulties small and medium enterprises in Ireland – but also in other eurozone peripheral countries – face in accessing bank credit. The paper uses European Central Bank and other data to show that Irish SMEs’ demand for credit is comparable to the average across the monetary union. But the number of businesses whose loan applications are rejected, or which face harsh or prohibitive terms or do not even apply for credit because they expect to be turned down, is among the highest in the eurozone.

This story matches that of other troubled euro members such as Spain and Greece. Outside construction, Spain retains many competitive companies in the private non-financial sector. But those that can viably expand complain that banks no longer give the necessary credit. Thus, with a quarter of the labour force unemployed, companies that could hire are prevented from doing so.

The Greek economy is a much bigger disaster than Spain’s. Even in Greece, however, some companies can do business – especially those involved in exports that benefit from the austerity programme’s painful grinding down of labour costs. But foreign suppliers and clients worried about Athens leaving the euro offer no forbearance to Greek companies, which are instead becoming completely dependent on domestic credit from a still-insolvent banking system.


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