U.S. Small Business and the Credit Debate--The European Element
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Cross-posted from the National Chamber Foundation's blog.
When the international economy started tumbling in 2008, it knocked down markets and businesses around the world like a chain of dominoes. In a globalized economy, there was little insulation for falling profits and soaring debt, which forced U.S. businesses to content not only with a weak American market but with shifting international demand and spending. Even as the United States has seen some growth and recovery, the ongoing debt crisis in Europe continues to impact U.S. businesses in many ways, one of which is ease of access to credit.
As seen in part one of this series, accessing credit has been difficult for some of America’s businesses. To understand how Europe’s crisis is impacting this challenge, the National Chamber Foundation spoke with Dennis Jacobe, Gallup’s chief economist, public opinion research director and financial services industry consultant.
“We surveyed in Europe when they were putting the Euro in,” he said, referring to the monetary shift from national currencies to the EU-wide euro. “People in Europe were split on the whole Euro structure. It is a very difficult financial structure, and everyone knows that now.”
Gallup first survey of European perceptions of the euro in 1998 found mixed sentiments. By 2000, perceptions were falling, and while the EU currency showed some promise as the U.S. dollar fell, the union’s economic decline revealed the challenges in using a multi-national currency when countries are individually responsible for their economic strategies and policies. Today, northern European countries (like Germany) are bailing out those in the south (like Greece and Spain) in an attempt to preserve the euro’s validity. Jacobe said this tug and pull of Europe’s debt crisis paints a bleak picture.
“It is hard to be optimistic about Europe in terms of solving the financial problems,” he said. The crisis “makes regulators worldwide more cautious because a lot people don’t realize that trust is a big part of any financial system.”
After the economic downturn, banks and regulators in the United States became concerned about the large amount of debt held and businesses’ ability to repay it. The rules and standards for granting credit became much tougher, making it difficult for some small businesses to get the funding needed to grow and hire.
“The thing that helps build trust and credibility is strength of the balance sheet,” Jacobe said. “What the euro crisis has done is heighten everyone’s sense that the balance sheet has to be stronger.”
This is one instance of where the access to credit problem lies. Europe’s debt crisis is weakening confidence and stoking fears that the EU’s economic woes will leak onto U.S. business balance sheets. Europe’s problems are muting trust in the improving conditions in the United States and business readiness to repay loans. As European economies struggle, it creates ripples throughout the global economy. For example, German manufacturing confidence faltered recently. A weak economy depresses spending and demand, which hurts production. This spreads throughout the international supply chain, impacting businesses outside the European market. The absence of trust in stability makes regulators and banks want stronger viability from potential debtors.
“A strong balance sheet and monetary authorities do what they can with flooding liquidity,” said Jacobe. “What the financial institutions have to fall back on is their capital levels. Regulators are going to put more and more emphasis on capital and that has the impact of making it harder for banks to make money.”
Fewer loans mean lower income for banks. Jacobe called this a “sign of the times.”
“Banks want to loan more,” he said. “They make money lending. It is just that the standards and regulatory levels in terms of capital requirements and in terms of underwriting standards are very strong. The big impact has to do with requirements to hold capital and requirements to underwrite loans that have permeated the industry.”
This is one element challenging U.S. businesses to meet the tough lending standards. Europe’s crisis is exacerbating what is already a difficult credit environment. One reflection of troubled international lending and debt was Moody’s Investors Service’s recent downgrade in credit ranking of some of the world’s biggest banks and financial firms. With much debt and a reduced capacity to issue new loans, banks are working to find ways through the international debt crisis. Do these downgrades impact the all-important trust? Jacobe says no.
“Moody’s is out of date,” said Jacobe. “Raters have sort of been slow, and I don’t think it has any impact. It is more of an international statement.”
That statement seems to reflect the uncertainty and weak trust in international lending. Having seen the dominoes topple before, the fate of Europe has a significant impact on how readily some U.S. businesses will be able to secure credit now and in the future.