Coface, the Paris-based business specialist, has issued a bulletin, which notes that the “credit crisis is spreading throughout Europe amid a deepening financial crisis, leading to a sudden squeeze in banking credit, plunging confidence levels, and a slowdown in activity.”
As a result, Coface has downgraded its credit ratings on the UK and Ireland to A2. Iceland, which had been placed on negative watch in March 2007, has been downgraded from A1 to A3. In addition Coface put Italy, France and Hong Kong on negative watch. A similar bulletin from Marsh’s London office, warns of the increasing credit risks in the UK (See related article).
Coface said the credit crisis is worsening significantly in the payment behavior of companies.” A credit crisis may be limited to a country, sector, region or may be global,” said the bulletin. “Coface has recorded four global credit crises since 1973 and the first oil crisis. Coface confirms that fifth global credit crisis has been ongoing since January 2008 and notes three main characteristics:
— The payment defaults index recorded by Coface rose by 36 percent during the period January-September 2008, compared with the same period in 2007
— The spread of the crisis by is less than during former crises, due to the resilience of emerging countries
— But the credit squeeze is stronger, because of the very specific financial component of this crisis.
In its analysis, Coface said the “credit crisis should be comparable to the 2001 credit crisis, but less extensive than the three former crises (1973, 1982, 1991). Like the previous credit crises, the current crisis should last between 18 months and 2 years, because even if the worldwide economy enters a long period of flat growth, companies will adapt.
“Both of these possibilities (the serious nature and the duration of the credit crisis) imply that other bubbles that have not yet burst are not expected to burst in the forthcoming months (dollar, China, credit bubbles on new financial instruments.)
“The increase in risk has led to a series of downgrades in country ratings, which began with the A1 rating for the United States being placed on negative watch in April 2007, and has now spread to the heart of the Euro zone.”
Yves Zlotowski, Chief Economist at Coface, explained: “The initial channel of the crisis was the property market, which heavily hit companies in countries where bubbles were in the process of bursting, like in the UK and Ireland. The worsening of the financial crisis has uncovered new transmission channels. It is notably contributing to sapping the confidence of economic players. The crisis has now reached the Euro zone, affecting Italy and France.”
Coface added that it continues to pursue “its role of cushioning the impact of the crisis for companies, by:
— Maintaining and even increasing its commitments. Since January 1, 2008, the volume of credit guaranteed by Coface to French companies has risen by 18 percent, reaching €52 billion
— Indemnifying claims, if there are any
— And also by playing a prevention role, helping companies to avoid working with customers who risk not paying them. The primary reason for a company to go bankrupt remains the bankruptcy of its main customers.
Source: Coface – www.coface.com
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