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The euro’s three-month rally against all but one of its major peers is imperiled by a deepening credit crunch for European companies that adds to the risk of another recession as the region’s counterparts recover.
The currency has weakened 3.1 percent versus the dollar from a four-month high on Sept. 17 as small and medium-sized companies that Deutsche Bank AG says generate as much as 70 percent of the economy are starved of credit. Loans from European banks slumped 0.8 percent in September from a year earlier. The last time lending contracted that much, in October 2009, the euro fell 5.8 percent in the following three months.
While European Central Bank President Mario Draghi has driven down speculation on the disintegration of the currency bloc, the median of 48 analyst estimates compiled by Bloomberg is for a decline of about 2.1 percent against the dollar by next September. Companies from Italian window maker Fenster Group Srl to Faustino e Ferreira, a Portuguese building materials firm, say they can’t get financing to expand.
“Draghi’s action has reduced sovereign risk but it’s not enough to improve the credit conditions in the periphery,” Athanasios Vamvakidis, the head of Group-of-10 foreign-exchange strategy at Bank of America Merrill Lynch in London, said in a Nov. 1 telephone interview. “Private-sector credit growth continues to be negative and lending rates remain a problem. This will continue affecting the euro.”
The 17-nation common currency fell as much as 0.5 percent to $1.2767, the weakest level since Sept. 11, before trading at $1.2786 at 11:30 a.m. New York time, down 0.4 percent from the close in New York last week. It slid 0.7 percent to 102.52 yen from Nov. 2, when it dropped 0.5 percent.
The euro has slipped from as high as $1.3172 on Sept. 17 as Spanish Prime Minister Mariano Rajoy delayed a decision on whether to accept Draghi’s offer to buy bonds to cut borrowing costs. The currency is still up from this year’s low of $1.2043 on July 24, when Spain’s surging yields threatened to shut the region’s fourth-largest economy out of financial markets.
After Draghi unveiled his bond-purchase plan on Sept. 6, strategists surveyed by Bloomberg raised their median euro prediction for the third quarter of 2013 to $1.25 from as low as $1.21 on Sept. 18.
Bank of America is more pessimistic. Vamvakidis predicts the euro will decline to $1.23 by year-end and reach $1.20 in the third quarter of 2013 because the ECB will have to do more to tackle the squeeze on lending.
Massimo Zappia, who started Fenster Group in Conegliano, northern Italy, after his previous employer went bankrupt, had to rescind signed contracts to supply 3,200 windows as 20 banks refused him loans to buy the raw materials and machinery needed to produce them.
“Banks keep telling me: ‘Why should I lend you money if I don’t lend it to your clients who want to buy a house?’” Zappia said in a telephone interview on Oct. 30. “Bureaucracy and the credit crunch are slaking the energy of those entrepreneurs, like me, who have been trying to react to the crisis with hard work, dedication and innovation. It’s like a bucket of cold water on a timid fire that is trying to remain lit.”
September’s slump in lending was the largest since October 2009, when a new Greek government sparked the debt crisis by revealing that its predecessor had underestimated the nation’s budget shortfall.
That was followed by a slide to $1.3863 on Jan. 29, 2010, from $1.4719 on Oct. 30, 2009. The currency weakened against all except two of its 16 major peers in that period and extended its drop to $1.1877 in June 2010, falling below the average of $1.21 since its inception in 1999.
Betting against the euro would be a mistake because the ECB’s bond-purchase program will boost demand for European debt and buoy other assets, according to Hans Redeker, the London- based head of foreign-exchange strategy at Morgan Stanley, who predicts the currency will strengthen to $1.35 this year.
“Markets are going to rally and it’s going to be accompanied by a stronger euro,” Redeker said in an Oct. 31 telephone interview. Spain will request aid and trigger ECB purchases “sooner or later,” he said.
While bank loans to smaller companies are declining, large firms in Europe’s periphery of Greece, Italy, Ireland, Portugal and Spain sold 7 billion euros of debt last month, the most since October 2009, data compiled by Bloomberg show.
Italian utility Enel SpA (ENEL) issued 2 billion euros of bonds on Oct. 8, while Portugal Telecom SGPS SA (PTC) sold 750 million euros of senior unsecured notes in its first benchmark-sized deal since February 2011.
That’s no comfort for Faustino e Ferreira, based in Leiria, Portugal, which has about 100 workers.
The company says it has been unable to get financing from banks to meet demand for its products from France, Angola and Mozambique. It rejected an offer for a four-year loan of as much as 600,000 euros at an interest rate of 8 percent, which would have been four times the amount charged two years earlier.
“Banks are simply not lending,” Paulo Sousa Alves, a company spokesman, said in telephone interview on Oct. 29. “If we could solve our financing problems our sales would increase about 60 percent a year and we could hire more people.”
The volume of loans to non-financial companies in the periphery is 45.7 billion euros this year, down from 62.2 billion euros for the same period of 2011, according to data compiled by Bloomberg.
Banks are charging interest at 352.3 basis points, or 3.523 percentage points, more than benchmark rates, up from 314.7 basis points a year ago, the data show.
Access to bank loans for small and medium-sized companies deteriorated in the period from April to September versus the prior six months, according to a Nov. 2 ECB report. Rejection rates for companies applying for loans rose to 15 percent from 13 percent, based on the central bank’s survey of 7,514 firms between Sept. 3 and Oct. 11. That’s the highest since 2009.
“Funding costs have increased significantly in the last three years,” said Luis Zapatero, chairman of Bodegas Riojanas SA (RIO), a La Rioja, Spain-based winemaker founded in 1890. “We really need those costs to decline because it’s affecting our profitability very negatively.”
European banks may have to sell as much as $4.5 trillion in assets through the end of 2013, which may limit lending and curb growth in Greece, Italy, Ireland, Portugal and Spain by as much as 4 percentage points, the Washington-based International Monetary Fund said in its Global Financial Stability Report, published on Oct. 9.
The supply of credit in Europe’s weaker economies is forecast to decline 9 percent through the end of next year under the IMF’s baseline scenario, according to the report.
Commercial and industrial loans by U.S. banks rose to almost $1.5 trillion in the week through Oct. 17, up 24 percent from the post-crisis low of $1.2 trillion in October 2010 and the most since May 2009, Federal Reserve data show.
“Corporates in Europe cannot gain access to fair market loans, which is the core of growth,” Robert Savage, chief strategist at New York-based currency fund FX Concepts LLC, which oversees about $3 billion, said in an Oct. 31 telephone interview. “That makes me negative on the euro.”
The shared currency will probably fall to $1.25 by year-end and to $1.15 by the end of 2013, Savage said.
An ECB survey of 131 lenders between Sept. 20 and Oct. 9 showed the proportion of banks reporting tighter standards on loans to companies rose to a net 15 percent in the three months through September, from 10 percent in the second quarter, the central bank said on Oct. 31.
Euro-area growth is lagging behind all G-10 nations, with the U.K. the only other economy set to shrink this year, analyst estimates compiled by Bloomberg show. The nations that share the currency will expand 0.2 percent in 2013, compared with an average of 1.34 percent for the G-10, separate surveys of economists showed yesterday.
Euro-area unemployment climbed to a record 11.6 percent in September, the European Union’s statistics office in Luxembourg said on Oct. 31. The ECB will leave its benchmark interest rate at a record-low 0.75 percent on Nov. 8, according to the median prediction of 63 economists surveyed by Bloomberg.
Eilis Quinlan, who started accountancy firm Quinlan & Co. in Naas, Ireland in 1992, said about a quarter of the company’s 400 clients are considering firing workers because they can’t get loans from banks.
“It’s terribly disheartening,” Quinlan said in a Nov. 1 telephone interview. “There are seriously viable businesses that have orders confirmed and they can’t get the working capital, so they are having to close, to lay people off day after day.”
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