Economic outlook
Naughty neighbours The impact of the eurozone crisis in 2012
Tomer Aboody, Director, Head of Business Development at MT Finance, highlights the current issues within the eurozone and the possible impacts on the Britiah banking sector
At MT Finance we work closely with introducers and borrowers to provide bridging loans which make sense. Our philosophy is that a bridging loan should either save or make a borrower money. As non-status lenders, one of our key considerations in assessing any application is the viability of the exit strategy. Liquidity in the financial sector is vital, whether the proposed exit is via the sale of an asset or refinancing, at some point conventional mortgage finance is probably going to be required.
It is within this context that, having experienced the initial credit crunch alongside the broker and borrower community, we have kept an eye on the events across the channel as the eurozone crisis unfolded in 2011.
Serious consequences Last year saw the most volatile trading periods since the start of the credit crunch in 2008. Fundamental flaws in the eurozone including insufficient universal fiscal policy, and fragmented supervisory mechanisms drew talk of currency failure. As the year unfolded ‘emergency’ meetings between Europe’s leaders became a common occurrence but left the markets unconvinced with analysts expressing that policy makers have left matters too late to avert a recession. Some are going as far as forecasting a break-up of the eurozone.
The issue facing the eurozone is not one of liquidity, but instead solvency. The question becomes what is the impact of the solvency issue on the liquidity of British banks?
The UK and its banks are deeply intertwined with the eurozone. According to data from the Bank for International Settlements, borrowers in Greece, Italy and Portugal owe British banks $50
billion. The Bank of England’s December Financial Stability Report shows UK banks have £160 billion exposure, equivalent to 80% of core Tier 1 capital, to the private sectors in Ireland, Italy and Spain. UK banks are also exposed indirectly through their lending to core European banking systems such as France and Germany which have large exposures to weaker European economies. Exposures to banks and the non-bank private sector in France and Germany amount to around 100% of core Tier 1 capital.
A series of disorderly defaults on sovereign debt or a failure of the common currency would have a profoundly damaging impact on the British banking system; however, we do not consider the ‘disaster’ scenario of currency failure or of a break-up of the eurozone realistic. The eurozone will, gradually, emerge from the present crisis with a stronger and more resilient fiscal and regulatory regime. In the fresh light of 2012 it is worth noting that the euro fell only 2.6 percent against the dollar in 2011 compared to a slide of 6.6 percent in 2010 and 4.2 percent in 2008. In December, Italy successfully auctioned €9 billion of six-month bills at an average of 3.25% - half the cost of its borrowing rate a month earlier, and the ECB successfully launched a new three- year liquidity scheme under which some 520 banks borrowed €489 billion.
As the sovereign debt crisis plays out in the coming months the ongoing uncertainty will have a direct impact on the banking sector in Britain. In its December Stability Report, The Bank of England urges caution in direct response to the eurozone situation. The report does state that UK banks are better capitalised than many of their continental peers, but recommends that further capital buffers are sought to protect them. The report suggests that this is done without
reducing lending to the real economy. The report proposes that if earnings are insufficient to build capital levels further, banks should limit distributions and give serious consideration to raising external capital in the coming months.
Knock-on effects Set against the backdrop of considerable exposure to the eurozone and faced with recommendations to further increase capital buffers, the report states a “clear risk is that the pressure on funding markets could result in a contraction in lending to the real economy”. The availability of credit remains tight. As short-term lenders we often find ourselves working closely with developers and real estate investors who, under previous market conditions, would have been able to secure high street funding for their projects. According to the Bank’s report, recent discussions with some of the major lenders confirmed that a period of sustained tight funding conditions could lead them to further reduce lending to the real economy.
As we look ahead in 2012 we do not foresee a catastrophic collapse of the eurozone nor a repeat of the previous full blown credit crunch in the UK, but it is clear that the year ahead will continue to pose challenges to lenders, brokers and borrowers alike. A continued strain on the availability of credit from the major banks is certainly to be expected. At MT Finance we are fortunate to be privately backed and are not reliant on, or subject to, a bank funder. Our approach in 2012 will be the same as it has been each year since our founding. We will continue to work closely with introducers and borrowers to provide bridging finance loans which work whilst delivering industry leading customer service. Whatever happens in Europe in 2012, at MT Finance, it will be business as usual.
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February 2012
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