We are in the middle of another global economic crisis. Four years ago the financial sector was paralysed by fear when the penny dropped that complicated financial products linked to (bad) US housing loans were worthless. This made it very difficult for banks to raise money, which in turn made it almost impossible for them to lend. The result was the credit crunch, which led to the global recession that we have yet to fully recover from.
Last week global stock markets shed £1.5tn as a result of fears that government bonds issued by struggling European economies (Portugal, Ireland, Italy, Greece and Spain) were similarly worthless. How has this impacted the UK? So far mainly on the stock exchange, where the FTSE 100 has fallen almost 13% in the past week. You read that right: on 1 August, the FTSE opened at a healthy 5,815 and by 8 August, it had hit a new 52-week low of 5,069. The sustained slump in the past week included (at the time of writing) four consecutive daily falls of more than 100 points, marking an unwelcome first in the 27-year history of the blue-chip stock exchange.
‘Stress tests’
Among those firms hit by investors’ flight from the equity market were Barclays, HSBC, Lloyds and RBS, whose shares all fell after new financial sector "stress tests" (passed by all but eight of the 90 European banks tested) failed to quell concerns over the impact of possible sovereign defaults in the eurozone. And to reiterate the lesson learned from 2007, what is bad news for the banks is always bad news for business. The big question now is, if we are heading into a second credit crunch, what if anything can business owners do about it?
Close Print Finance director David Bunker points out that the impact of the political indecision (on both sides of the Atlantic) on markets will also have a bearing on consumer and business confidence and by extension GDP. "The gross domestic product of the economy is affected by what people’s rational expectations are. If people and businesses have low expectations about the economy then they are likely to lower their spending and investment," he says. "Combine this with downward pressure on government spending and the opportunity for the economy to grow is restricted. My view is therefore that all the bad news coming from the eurozone and the US is bound to negatively impact on business this year."
However, this is not to say that printers should rule out investment. Printers who last made any significant capex in the early 2000s and then delayed reinvestment when the credit crunch hit in 2007 will now be running presses that are at least two generations old. Keeping these presses running will involve considerably higher costs compared with printers running newer machinery. Mark Nelson, director of Compass Business Finance, says that printers need to beware the false economy of standing by older machinery and invest in flexible capacity that will allow them to be competitive today and increase capacity without further investment in the future. "We’re seeing a lot of people taking two machines out and putting one newer machine in and running it on double days rather than 24 hours," he adds. "So they’ve removed cost from the business through removing personnel – but if the need arises they can increase capacity through overtime or part-time staff. That’s a very viable proposition from a finance house credit perspective."
Lending crisis
Finance experts – along with the rest of us – will hope that a second credit crunch is not inevitable. However, the fact remains that when banks ability to borrow becomes restricted, so does their ability to lend. Gerry Hoare of Deal Bureau says: "In terms of impact for SMEs, this means capital in our retail banks is going to be tighter. The banks will need to look at customers they sanction and they are likely to be even more cautious. Meaning it will be tougher for businesses to obtain credit." Hoare advocates coming up with a plan charting the needs of your business over the next two years and the corresponding funding requirement. "Try to get committed facilities that are not repayable on demand like an overdraft to give them some longer-term certainty," he adds. "ABL can do this or term loans. I think there will be a number of overseas banks and secondary lenders coming to market offering loans; however, they are more expensive."
The worst-case scenario for the coming 12 months would be a new credit crunch, followed by another recession. Avoiding this may require a significant increase in the European Financial Stability Fund, which is being used to buy government bonds among the struggling European nations. This could prove highly unpopular in northern European countries, where politicians will struggle to convince the public that paying off southern European debt is in their best interests. All SMEs can do therefore is hope for the best while preparing for the worst. "I know this isn’t anything new, but companies need to sit down and plan," says Hoare. "Which is probably the last thing on their mind when many will just be trying to survive."
30-SECOND BRIEFING
• Global stock exchanges have plummeted in the past week on fears of sovereign debt defaults in the eurozone and the possibility of a new recession in the US
• Share prices at Barclays, HSBC, Lloyds and RBS were all hit leading to fears that lending to SMEs might become constricted by the banks’ own inability to raise funds
• Finance experts believe the bad news coming from the eurozone and the US will have a negative impact on business this year
• For printers who have delayed capex since 2007 or earlier, holding off on reinvestment for much longer may not be an option. Doing so may be a false economy given the greater speed and efficiency of newer equipment, which would allow profitable printing on reduced shift patterns, while providing flexible capacity when growth returns
• The economic events causing the current loss of confidence could – in the worst case – lead to a new credit crunch followed by a double-dip recession. Printers are advised to plan now to get their funding in order
