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European Businesses Caught In Credit Squeeze From Greek Debt Crisis

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When Tadeusz Nowicki visited his local bank in early May looking for credit to expand production at his profitable and fast-growing plastics processing company in Warsaw, Ergis-Eurofilms, he got a lecture instead.

“The banks are putting out the message that the high leverage times are over,” Mr. Nowicki said.

Never mind that Poland has one of the fastest-growing economies in the European Union, or that Ergis-Eurofilms increased profit last year by 70 percent, to 17 million zloty, or $5.2 million, in the midst of a global recession.

The Greek debt crisis and its ripple effects across Europe are crimping credit, especially for midsize and smaller companies and especially those in countries perceived as riskier — starting with Greece but also including Portugal, Spain and others on the periphery.

That means the credit crunch could be most severe in the countries most in need of economic growth. In fact, the crisis is dividing up companies into credit-haves and credit-have-nots.

The haves include companies like SAP, the German maker of corporate software. In April, SAP issued €500 million, or $618 million, in corporate bonds with an interest rate of 2.5 percent, which compares favorably with German government bunds, the gold standard in the European debt market.

The have-nots include companies like Vostex, a family-owned textile company with 10 employees located in the Athens suburb of Peristeri. “The banks are getting stingy,” griped Harry Vostantzoglou, chief executive of Vostex. He said that Vostex was profitable and that he expected it to survive even without the local banks. Still, he said he might postpone international expansion plans.

As at Vostex, lack of credit can translate into reduced investment and job creation. If the crunch persists, it could slow European growth, hold down tax receipts and make it that much harder for such countries as Greece, Portugal and Spain to get their debts under control.

European banks, still recovering from the financial crisis, had tightened their standards for borrowers even before sovereign debt jitters struck. Lending fell at an annual rate of more than 2 percent in the first quarter of 2010, according to European Central Bank data.

Now there are signs the availability of credit to business could worsen further as banks and investors demand higher risk premiums. The situation is especially dire for companies in the highly indebted countries, where rates for business loans tend to reflect the risk premium that the local government is paying. Banks in Greece have also been hit hard by their government’s debt crisis and the economic downturn, making it tougher for them to lend.

Looks like we are going to have a businessless recovery.

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Things can turn sour in a flash.

In late 2008 Volvo trucks went from an order book of over 100,000 and a 6 month fulfilment period to an order book of less than 15, and a begging bowl. I was in Saudi in November when they called up a gentlemen who, only a month before, had been told that they could not fill an order for 6 months. Volvo were begging him to take some trucks.

Looks like it could happen again.

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