There’s a lot of chatter about, not least in government circles, that banks are not lending to small and medium enterprises (SMEs) which are the main job creators in the British economy.
Banks are currently in an invidious position. They are being prodded to lend more, while simultaneously adding billions to their capital reserves. Non-expert ministers and MPs, such as Vince Cable, imagine that because a couple of banks received public money as a bailout, they are duty bound to risk yet more in a very uncertain marketplace.
What then are the facts for a bank like HSBC, one of the world’s largest:
So what are the facts? HSBC’s new small business lending was up 38 per cent in the first half; across all top banks and all small firms, the amount of new lending is down on 2009, at £520m per month, just enough to match repayments and defaults. Why? Demand for credit has dropped. Uncertainty means firms are trying to reduce their debt; small firms hold a record £56bn on deposit. HSBC’s corporate overdraft utilisation rate has fallen to 42 per cent, from 44 per cent: facilities are not being used. Rates are neither ultra-cheap nor extortionate: small corporate borrowers are not usually being priced out.
The supply of credit has also diminished. Banks have rightly become more realistic when assessing projects in a low-growth environment. Some lenders have quit the market. The remaining ones have been told to put more money aside (boosting capital), to shrink balance sheets, and to borrow less on the wholesale markets (a problem given that low saving rates have forced many banks to rely on money markets to fund new loans).
It’s not rocket science. Perhaps the Lib Dem contingent in the Coalition Government will have less to say on the matter in future.
Quote: City AM
Société Générale’s key strategist, Albert Edwards, has warned of an impending bloodbath in stock markets. October is a traditional month for share crashes.
He said: “Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst.”
Edwards went on to say: “So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the [US] manufacturing ISM slides below 50 into recession territory in coming months.”
We are, he said, about to witness a “valuation nadir last seen in 1982.”
A dead-cat bounce appears to be underway in the US. Under the heading, “Refinancing avalanche threatens European banks,” Open Europe is reporting a €2trillion black hole in European banks. Nothing is going right on either side of the Atlantic.
The think tank says, “FT [Financial Times] Deutschland reports that there is a ‘€2,000 billion problem in European banks’. It notes that ‘the real stress test still has to come. Banks must refinance billions. A refinancing avalanche is coming their way’.
As for America, the Telegraph’s Jeremy Warner writes on his blog: “… the IMF in its ‘selected issue paper’ on the US economy calculates that ‘closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.’ As Professor Kotlikoff notes, the entire Federal tax base amounts to 14.7 per cent of GDP, so to close the gap from a revenue perspective would require the authorities to double the rate of taxation in the US.”
There are also reports that the Fed has begun a second round of Quantitative Easing (QE, or printing money in the vernacular). Labelled QE2 or QE Lite, it’s thought to be preface a plumping up the Fed’s balance sheet from $1.2trillion to around $5tr in the near term.
Both the US and the eurozone appear to have intractable problems going into the medium term. The notorious “double-dip” seems ever more likely, but what chance of a new Great Depression?
New figures show that the UK economy shrank by 2.4pc in the first quarter of this year. This is a revised number down from the 1.9pc previously reported.
It shows that the UK is in a much worse downturn than many expected and so-called green shoots of recovery are isolated statistical blips.
Many forecasters are now turning away from the much-hyped V-shaped recovery pattern, and even a more leisurely U-shape, to a wobbly “W”, or double-dip delayed type of recovery.
It’s clear the British economy is still in freefall. As in the 1980s, the biggest decline has been in manufacturing. While the public sector has continued to grow, the makers of things have taken blow after blow.
The weakest sectors have been new housebuilding and car making.
This is beginning to look very serious indeed for UK industry and any company in the private sector.