Under the deal – which involved heads of state, bankers and the International Monetary Fund – private sector banks agreed to negotiate a nominal 50 per cent cut in bond investments to reduce Greece’s debt burden by €100 billion, which would cut the state’s debt to 120 per cent of GDP by 2020, from the current 160 per cent.
The deal pushes for greater involvement of the private sector in Greece, with “credit enhancements” offered to the private sector totalling €30 billion.
The reaction from markets to the Belgian summit produced a surge as European shares soared to their highest in 3 months on Thursday. The STOXX Europe 600 Banking Index rose 8.9 per cent and the FTSEurofirst 300 index of top European shares rose 3.7 per cent to 1020.10 points, the highest since August. London’s blue chips’ shares soared 2.9 per cent.
US equities recorded their best monthly performance in 37 years, having briefly entered a bear market at the start of October; the S&P 500 gained 13.6 per cent for the month.
However investors are wary of chasing the market’s bullish rebound and this is exacerbated as finer details of the deal emerge. Indeed, if the markets follow the pattern set after previous big European meetings since the seminal bail-out of Greece, the next week is likely to reflect the pessimistic mood of investors.
Bank of England Governor, Sir Mervyn King, believes the €1 trillion rescue package to save the eurozone from financial meltdown will merely provide a “breathing space” to sort out the crisis and asserts it is “surely time to accept that the underlying problem is one of solvency, not liquidity.”
Jens Larsen of Royal Bank of Canada believes, “It remains a deal long on intentions and short on details.”
Foreign influence on business trade
One such detail emerging is the intention to obtain non-eurozone capital to solve the debt crisis. The head of Europe’s most powerful national industry body has warned of the dangers of political influence on trade. Klaus Regling, chief executive of the European Financial Stability Facility, held discussions with senior Chinese finance officials over a possible Chinese contribution to help resolve the Eurozone debt crisis.
Eurozone business leaders are concerned that Europe could potentially declare China a free-market economy, a move that could send EU import tariffs falling drastically.
“Asking a non-eurozone nation to help the euro would give the other nation the power to decide the fate of the single currency,” Hans-Peter Keitel, president of Germany’s BDI industry association.
The eurozone’s private sector witnessed reduced business activity signifying that the bloc’s economy is in danger of moving into outright recession. The Flash Markit Eurozone Services Purchasing Managers’ Index (PMI) dropped to 47.2 from Septembers 48.8.
“There is little to see what will cause an improvement for the first quarter (next year) unless European leaders in the next few weeks manage to bring out a convincing package to restore confidence,” said Markit’s chief economist at survey compiler Markit.
UK exposed to Eurozone debt crisis
UK firms are also facing repercussions of the eurozone crisis; sales and orders fell significantly for London firms in Q3, particularly in export markets. It has raised the point that UK businesses are not immune to the Eurozone debt crisis.
Is Quantitiatve Easing providing adequate capital distribution to firms?
Sir Mervyn King admitted this week that the second round of quantitative easing, announced early last month. may not increase lending by banks to small and medium sized businesses across the UK. Members of Parliament have been critical about whether State backed RBS and Lloyds Banking Group is doing enough to support small UK firms.
Mr King implied that the Treasury may utilise partly State-owned banks to channel more funds to struggling firms.
Figures indicate lending to small business is reduced and more expensive
Bank of England figures for August show that banks reduced their lending to businesses. Banks also approved fewer mortgages last month; together they suggest the flow of credit around the economy remains weak. The reduction has become increasingly political and the coalition government has proposed a new “credit easing” mechanism to effectively distribute credit to businesses.
The cost of borrowing rose from 4.67 to 4.68 per cent and lending to small businesses fell by 5.1 per cent in August. The European Investment Bank (EIB), a major source of small business loans is also restricting its available credit. The EIB has supported discounted loans to 7,500 UK small and medium-sized businesses in the last four years and is able to offer a discounted rate to typical high street bank rates due to its credit rating. The discounts ranged between 0.8 and 0.6 per cent.
Loss of confidence among small businesses
The British Bankers’ Association’s (BBA) Business Finance Taskforce was established a year ago with the expectation of increasing liquidity in the private sector. Despite several taskforce initiatives, lending demand has decreased and the taskforce’s first quarterly finance monitor report illustrated just how disillusioned entrepreneurs are with leading banks. The report found only 15 per cent of small businesses – approximated 670,000 firms – needed funding during the last 12 months but did not apply for it.
SME’s owed billions in late payments mostly from large companies
SMEs are owed £33.6bn in late payments according to a survey conducted by Bacs. The figures reflect an average of £39,000 per business surveyed. The figures have seemingly increased by 10% over the last year and are the highest since 2007.
The research revealed large corporate are behind 48% of SME late payment debt, while government and not-for-profit organisations are among the most punctual payers with just 9% of SMEs experiencing overdue payments from this quarter.
The retail and distribution sectors were hit the hardest, owed a combined £16.6 bn.
Mike Hutchinson, head of marketing at Bacs, said: “The issue of [[Late payment to small businesses|late payment]] is continuing to get worse for SMEs in the UK at a time when they need to be able to plan ahead for growth and ensure a strong cash flow.”