Crisis in Europe Tightens Credit Across the Globe

From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.

The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

The deteriorating situation in the euro zone prompted the Organization for Economic Cooperation and Development on Monday to project that the United States economy would grow at a 2 percent rate next year, down from a forecast of 3.1 percent growth in May. It also lowered its economic outlook for Europe and the rest of the world, and a credit contraction could exacerbate the slowdown.

In addition, Moody’s Investors Service, the credit-rating agency, on Monday raised the possibility of mass downgrades of European government debt if a forceful resolution to the escalating crisis was not found.

Investors have begun to treat Europe’s big banks as the weak link in the global financial chain because of their huge holdings of bonds issued by debt-laden governments like Italy and Spain.

American money market funds have been closing the spigot of money they lend to European banks, forcing them to tighten lending standards and, in some cases, even withdraw financing from longtime customers. To make matters worse, European institutions are simultaneously under pressure from their regulators to hold more capital for each dollar they lend, prompting many banks to reduce their portfolio of loans. Analysts say Europe’s banks could shed up to 3 trillion euros of loans over the next few years, equal to about 10 percent of their total assets.

“If your largest banks aren’t able to provide credit, it hinders economic development and contributes to a recession,” said Alex Roever, a fixed-income research analyst at JPMorgan Chase.

Air France, for example, typically relied on French banks like BNP Paribas and Société Générale to help it finance about 15 percent of what it spends to purchase airplanes. Now those banks are retreating from making airline loans to save capital.

As an alternative, Air France officials say that they started developing closer ties with Chinese and Japanese banks, which have not faced the same pressure as their euro zone counterparts, to help pick up the slack.

Executives of Emirates Airlines, based in Dubai, are turning to the Islamic financing system, as well as to lenders in emerging markets, to help pay for its new fleet as some of the European banks shut off lending. Emirates has ordered 243 aircraft, worth more than $84 billion, from Airbus, Boeing and other aerospace companies.

“We were kind of planning for finance from the European banks,” Tim Clark, president of Emirates, told Reuters. “It’s just a bit difficult now.”

A failure to secure financing could quickly add up to lost jobs in the United States, Latin America and elsewhere.

The airplane maker Boeing recently warned that a European pullback could affect its business next year. With some European banks out of the picture, “this leaves a difference that must be made up by other sources if airplane deliveries across the industry, already set to increase in 2012, are to occur as planned,” said John Kvasnosky, a spokesman for the company.

Embraer, a Brazilian aerospace company, tempered its growth expectations despite having a pickup in commercial and business jet sales in the third quarter.

“This whole situation in Europe again has stalled this recovery process,” said Frederico Curado, chief executive of Embraer, in a conference call with investors in early November. “The way we see the world going forward is of a moderate growth.”

It remains to be seen, though, whether even moderate growth can be achieved. Moody’s cautioned that there was an increased chance that more than one country in the euro zone could default. In spite of that warning, investors put their fears aside and sent stocks up Monday by nearly 3 percent in New York.

Investors remain hesitant about government bond offerings, though. A tepid auction in Germany last week was particularly unnerving since its economy has long been seen as Europe’s financial bulwark. In Italy, weak demand for bonds pushed yields back above the critical 7 percent threshold, a level that has prompted other government borrowers to seek bailouts. NYT