NEWS RELEASE: Credit crisis worsens in Europe: Coface downgrades the United Kingdom, Ireland and Iceland; Italy and France on negative watch
October 30, 2008
Paris - October 30, 20008 - The credit crisis is spreading throughout Europe amid a deepening financial crisis, leading to a sudden squeeze in banking credit, plunging confidence levels, and a slowdown in activity. As a result, the ratings for the United Kingdom and Ireland, which were placed on negative watch in June and December 2007, respectively, have now been downgraded to A2. Iceland, placed on negative watch in March 2007 is downgraded from A1 to A3. Italy, France and Hong Kong have been negative watch-listed. The credit crisis for Coface is a significant worsening in the payment behavior of companies. A credit crisis may be limited to a country, sector, region or may be global. Coface has recorded four global credit crises since 1973 and the first oil crisis. Coface confirms that fifth global credit crisis has been ongoing since January 2008 and notes three main characteristics: The credit crisis should be comparable to the 2001 credit crisis, but less extensive than the three former crises (1973, 1982, 1991).
- The payment defaults index recorded by Coface rose by 36% during the period January-September 2008, compared with the same period in 2007
- The spread of the crisis by is less than during former crises, due to the resilience of emerging countries
- But the credit squeeze is stronger, because of the very specific financial component of this crisis.
Like the previous credit crises, the current crisis should last between 18 months and 2 years, because even if the worldwide economy enters a long period of flat growth, companies will adapt. Both of these possibilities (the serious nature and the duration of the credit crisis) imply that other bubbles that have not yet burst are not expected to burst in the forthcoming months (dollar, China, credit bubbles on new financial instruments.) The increase in risk has led to a series of downgradings in country ratings, which began with the A1 rating for the United States being placed on negative watch in April 2007, and has now spread to the heart of the euro zone. "The initial channel of the crisis was the property market, which heavily hit companies in countries where bubbles were in the process of bursting, like in the UK and Ireland," explained Yves Zlotowski, Chief Economist at Coface. "The worsening of the financial crisis has uncovered new transmission channels. It is notably contributing to sapping the confidence of economic players. The crisis has now reached the euro zone, affecting Italy and France." A property crisis followed by a financial crisis has led to a palpable worsening of credit risks in the United Kingdom, Ireland and Iceland. In the United Kingdom, Ireland and Iceland, the downturn in the property sector has been the main cause of the crisis. Following the United States and Spain, the A1 negative watch-listed ratings of these countries have been downgraded to A2.
- In the United Kingdom, the financial and property crisis is having an ever-increasing impact on household spending and company expenditure. There has been a marked increase in company bankruptcy (up 14% during the first half of 2008).
- In Ireland, the property crisis has spread to the whole economy, bringing about a recession. Company defaults rose by 75% during the first half of the year.
And Iceland is faced with the collapse of its banking system on top of the downturn in the property market. The seriousness of the crisis brings Coface to downgrade its A1 negative watch-listed rating to A3. Coface forecasts increasing difficulties for companies in these three countries. The drop in confidence and the credit crunch are hindering companies in Italy and France. In Italy, company risks are deteriorating in a context of flat growth, rising costs and a credit squeeze. The country's A2 rating has been placed on negative watch-list. France's A1 rating has been negative watch-listed. Coface has noted a sharp rise in the amount of defaults by French companies (up 75% at the end of September 2008 compared to September 2007). The rise has been especially notable since summer. "The transport, construction and property sectors have been the first to be hit," states Olivier Cazal, Coface's underwriting manager for France. "This deterioration is due to the increased difficulties companies are facing in accessing credit, and also to the slowdown in activity." Coface, however, is pursuing its role of cushioning the impact of the crisis for companies, by:
- Maintaining and even increasing its commitments. Since January 1, 2008, the volume of credit guaranteed by Coface to French companies has risen by 18%, reaching €52 billion
- Indemnifying claims, if there are any
- And also by playing a prevention role, helping companies to avoid working with customers who risk not paying them. The primary reason for a company to go bankrupt remains the bankruptcy of its main customers.
About Coface Coface's mission is to facilitate global business-to-business trade by offering its 130,000 customers four business lines to fully or partly outsource trade relationship management and to finance and protect their receivables: credit insurance, factoring, ratings and business information and receivables management. Thanks to the worldwide local service delivered by 7,000 staff in 65 countries, over 45% of the world's 500 largest corporate groups are already customers of Coface. Coface is a subsidiary of Natixis whose share capital (Tier 1) was 12.9 billion euros at the end of June 2008. Learn more at www.coface-usa.com. ========================== About Coface Ratings: Assessing the average short term risk level of companies in 155 countries Country @rating -- one of Coface's key skills -- allows the various players in international trade to enhance the security of their transactions. It indicates the level of medium-term risk presented during the course of short-term commercial transactions by companies in a given country. More precisely, it measures how these financial engagements are influenced by the economic, financial and political outlook of the country, together with the business environment. The rating is based on three modules: a country's economic, political and financial outlook (such as weaknesses in the geopolitical environment, economic vulnerabilities, risk of foreign currency liquidity crisis, external over-indebtedness, government financial vulnerability and weakness in the banking sector), business climate and company payment experience. These three modules are combined to achieve a global rating to be accorded to each of the 155 countries tracked. The ratings are monitored on the basis of seven risk categories: A1, A2, A3, A4, B, C and D in ascending order of risk. Ratings are updated regularly, at least every quarter during country rating committees, when experts examine changes on a case by case basis. Ratings are available at www.coface-usa.com.
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