The credit crisis is spreading throughout Europe amid a deepening financial crisis. This has led to a sudden squeeze in banking credit, plunging confidence levels for economic players and a slowdown in activity. As a result, the ratings for the United Kingdom and Ireland, which had been 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.

Coface confirms that a global credit crisis is currently running since January 2008.

• This credit crisis should be comparable in extent to the 2001 credit crisis, but lower than the 3 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 the mean of demand is lesser than during former crises, thanks to emerging countries’ resilience
  
  - But the credit squeeze is stronger, due to the very specific financial component of this crisis.

• Like the former credit crises, this credit crisis shall last between 18 months and 2 years, because even if the worldwide economy enters a long period of flat growth, companies will adapt.
• These both possibilities (ref. the serious nature and the duration of the credit crisis) imply that other bubbles which have not yet burst should not burst in the forthcoming months (dollar, China, credit bubbles on new financial instruments).

This 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," Yves Zlotowski, Chief Economist at Coface, explains. "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 on from the United States and Spain, these three countries now see their A1 negative watch-listed ratings 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 Italian and French companies


In Italy, company risks are deteriorating in a context of flat growth, rising costs and a credit squeeze. Its A2 rating has been placed on negative watch-list.


France's A1 rating has been negative watch-listed. The country has, in turn, been affected by the credit crisis. Coface has noted a sharp rise in the amount of defaults by French companies (up 75% end September 2008 compared to end 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 1 January 2008, the volume of credit guaranteed by Coface to French companies has risen by 18%, reaching €52 billion;

-by 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.

[1] The credit crisis for Coface is a significant worsening in companies’ payment behaviour. A credit crisis may be limited to a country, a sector, a region or may be global. Coface has recorded 4 global credit crises since 1973 and the first oil crisis, and the 5th crisis began in January 2008.

 Top