IMF warns business as EU outlook worsens

IMF warns business as EU outlook worsens


European businesses will suffer a sharp contraction in credit next year as the full consequences of the global crisis unfold for non-financial companies, the International Monetary Fund predicted on Tuesday.

“In the US we already see a lack of access to credit for companies. In Europe there is a bit of a longer delay in the credit cycle. But there will be a very sharp slowdown in credit growth next year,” Alessandro Leipold, acting director of the IMF’s European department, told the Financial Times in an interview.

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Analysis: European business feels the heat - Oct-09EU leaders demand recession safeguards - Oct-16European businesses hit by tightened credit - Sep-16Europe ‘facing tougher time than US’ - Oct-01Mr Leipold was speaking as the IMF published its latest regional economic outlook for Europe, forecasting growth in eurozone gross domestic product of 0.2 per cent next year, down from an expected 1.3 per cent in 2008.

For the 27-nation European Union, the IMF predicts GDP growth of 0.6 per cent in 2009, down from 1.7 per cent this year.

According to the IMF report, bank lending to eurozone non-financial companies reached a record nominal annual growth rate of 15 per cent last March. Mr Leipold said the credit cycle had clearly turned since then, bringing higher borrowing costs and tighter bank lending standards.

“Our forecast is that credit growth will fall to a low single-digit figure next year, maybe 2 or 3 per cent. It’s already down now to about 10 per cent,” he said.

He said the sharp slowdown in bank lending would reduce inflationary pressures in the eurozone, opening an opportunity for interest rate cuts next year by the European Central Bank.

“Inflation risks are clearly disappearing. We wouldn’t speak of upside risks at all. We see further scope for monetary easing,” Mr Leipold said.

The IMF, which is working to stabilise the financial systems in Hungary and Ukraine, had detected risks that contagion from the global crisis might infect other parts of central and eastern Europe, he said.

With about three-quarters of the region’s banks owned by foreign institutions, based principally in western Europe, there was a risk that problems at the parent banks would cause the flow of funds to their subsidiaries to dry up.

“In western Europe, recapitalisation and other measures have been taken to support the parent banks, and that should be positive for eastern Europe. But there’s an issue of co-ordination across borders. If you offer favourable treatment for banks in western Europe, you could create adverse circumstances in eastern Europe.”

Mr Leipold said the IMF would like to see better co-ordination of financial market supervision in Europe, with one possibility being a “hub and spokes” system in which a strong central supervisor worked in close contact with supervisors at national level.

Acknowledging the political resistance in some EU countries to a more centralised system, he said: “We hope the financial crisis will be an opportunity to cross some political red lines.”

FINANCIAL TIMES