Credit rationing threatens the economy

The deterioration of bank balance sheets weighs on the sources of financing for growth

Should we fear for the financing of the economy? The question begins to shake the business community, worried both by the decline in the stock market and the deterioration of the financial situation of banks. How, they wonder, will we finance economic development, if the money dries up on the stock market and if the banks, for their part, for lack of capital, close the credit tap?

In the United States, 130 billion dollars (82 billion euros) have already been swallowed up by the banking system, in the form of new capital, without the health of US banks improving, quite the contrary. The situation of European banks is hardly better, as the second wave of the subprime crisis (risky mortgages) is formed with the bankruptcy of so-called “monoline insurers”. Even banks that have not taken direct risks on the subprime market will be affected and will suffer losses.

Now in line with the idea that the worst of the financial crisis from the subprime probably has not passed, economists expect difficult months. “We do not know when or how intense it will be, but there will be a” credit crunch. ” Households and businesses will suffer, especially the most fragile, SMEs,” warns Olivier Pastré, professor of economics at the University of Paris-VIII and co-author of the true novel of the financial crisis (Ed. Perrin, 2008, 275 pages, 19 euros).

This credit crisis would already be felt at the micro-economic level, according to the accounts of businesses and households. These contrast sharply with central bank lending statistics – notably with the growth rate of lending to businesses and households in the euro area of April, by + 10.6% – still very largely positive, but behind the reality. “The statistics take into account the year-on-year growth, and they can also be multi-year lines of credit, granted to companies when things are going well,” says a relative of banking supervisory authorities.

On the contrary, economists seem, on the other hand, to be divided on the consequences of such a credit crisis, and especially on how to continue financing growth. For some, it will change the model, out of an economy of over-indebtedness, funded in recent years by exaggerated “leverage” to a capital-financed economy.

This change of model should then favor the rise in the economy of investors in the long term, investors with deep pockets escaping the constraint of immediate profitability, such as, for example, sovereign wealth funds, pension funds or public financial institutions.

In times of turbulence in the markets, these investors – which all Western countries are now trying to attract – would ensure long-term financing of large companies listed on the stock market, while stabilizing their capital. The economic crisis of 1929 resulted in the return of capital financing.

Rebalancing

Other economists, more nuanced, believe that the current crisis will lead to a rebalancing between market financing and bank loans.

This is the case of Nicolas Véron, a researcher at the Bruegel center. Convinced that “the difficulties of the banks, in tension on their own funds, will be transmitted to the economy”, Mr. Véron expects a braking brought to the dynamism of small and medium enterprises, the most job creators. France, where large local banks such as Crédit Agricole have suffered from the crisis of subprimes, should be concerned by this slowdown.

But Mr. V.éron does not believe in a revision of the model of financing of the economy, estimating that “one will not be able to replace the debt by capital”. Explaining that despite appearances, “the stock market (with the exception of banking stocks) collapses less than credit,” the economist advocates a system “more open to market financing”, as is the case overseas. This, he believes, would “limit the vulnerability of the economy to a banking shock”.

Finally, Judge Christian de Boissieu, “the current pessimism is perhaps excessive”. While emphasizing the seriousness of a crisis which, for the first time, sees three major shocks: oil, food and finance, the economist believes that the liquidity, which is very abundant in the world, will end up supporting the rebound in markets and the economy. “The money which is nowhere must be somewhere (the money that is nowhere must be somewhere),” he concludes, citing economist Sir Dennis H. Robertson, who was the opponent of Keynes.