Updated March 12, 2012, 8:56 p.m. ET

Le Crédit Crunch Isn't Over


The Italian industrialist looked the part. An elegant suit (I think I spotted "Canali" on the inside pocket), a full mane of hair with enough salt in his pepper to make him look distinguished, and the polite manners that come from the proper upbringing and vast wealth. And yet, in our recent encounter, something was amiss. "I am not worried about us. We are big enough and we'll be all right," he said. "But if our suppliers can't get funding from banks, we will all be in trouble." He was talking about the biggest elephant in European Union boardrooms—le crédit crunch, il crunch, el crunch. Whatever the language, not much is lost in translation: As the euro-zone economy slumbers in recession and its banks shrink, companies are finding it harder to fund their operations and investments. Christian Noyer is France's central bank governor. In the last quarter of 2011, credit extended by banks to euro-zone companies fell by 0.5% from a year earlier, according to official figures, with countries like Spain, Portugal and Greece suffering steep declines. As the European Commission laments in its latest economic forecast, "credit expansion in the EU and the euro area is bound to remain anemic in 2012." The narrative of the European crisis has largely focused on governments, markets and financial groups. Corporations have been conspicuous for their absence, a strange development given that they are the main drivers of economic growth, job creation and stock-market gains. Last week's Greek debt deal may have allayed the darkest fears of a breakup of the euro, but the long, hard slog of rebuilding the euro-zone economy has to go through the factories and offices of corporate Europe. And they can't do it without banks. The potential for a credit crunch is more than a domestic European issue. Plenty of U.S. funds own shares and bonds of the Continent's corporate champions. As for Wall Street banks and private-equity groups, the predicament presents both risks and opportunities. They have considerable exposure to those companies and will suffer if the situation deteriorates. But they can also win lucrative business by filling the funding gap left by their EU rivals. Most companies, especially smaller ones, rely on bank lending to grow. In Europe, this is even more true because, unlike in the U.S., the majority of corporate funding comes from loans rather than capital-market debt. The crisis, however, has left EU banks and companies with what Italians call "una coperta troppo corta"—a blanket that is too short to cover their competing needs. Banks are under tremendous regulatory pressure to increase capital, clean up their balance sheets and reduce risk. That, in turn, has prompted them to tighten the lending spigot. Anxious to cover themselves, lenders have pulled the blanket away from companies. When the European Central Bank polled some 120 financial groups in January, more than a third said they had tightened lending standards in the previous three months, while nearly one in three predicted they would make it even more difficult for companies to borrow in the first quarter of 2012. To be clear, a surge in defaults among large European companies is unlikely because they tend to have ample cash reserves and can, by and large, tap the debt markets. Smaller enterprises, however, may face tougher times because they aren't as adroit at using capital markets and they are the first companies to be ditched by banks when the going gets rough. The good news is that the ECB's recent extensions of around €1 trillion ($1.31 trillion) in cheap loans to banks across the Continent should help ease the funding strains of both lenders and borrowers. In theory, that is. Central bankers such as France's Christian Noyer have already urged banks to use the funds "to be proactive." But CEOs will have to balance those demands with equally powerful calls to curb risks. The European Commission, for one, believes that "the transmission from central bank liquidity to additional loans to the private sector remains impaired." One man's impairment should, however, be another man's opportunity. In a report released Monday, the Bank for International Settlements wondered whether "other financial institutions will be able to substitute for European banks as the latter continue to deleverage."

which profess to be fighting fit with plenty of capital. but it could be very profitable. on page C1 in some U." It makes perfect sense: Unmet credit demand from companies should enable those with capital to charge attractive prices and allow would-be acquirers to pick up bargains. It won't be risk-free. Private equity already is. 
 . 13.U. should answer the call and look across the Atlantic to deploy their funds. —Francesco Guerrera is The Wall Street Journal's Money & Investing editor. Carlyle Group's co-founder. Write to him at: currentaccount@wsj. editions of The Wall Street Journal. The animal spirits of U.com A version of this article appeared Mar. with the headline: Le Crédit Crunch Isn't Over Just Yet. David Rubenstein. banks.S. told a recent industry conference that Europe is "the world's greatest single opportunity. 2012.S.S. financial groups ought to point them squarely in the direction of the corner offices of the Old Continent.

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