Tuesday, 30 July 2013

Guest post - Global Financing Gaps and Credit Availability - Rcube Global Macro Research

"Most people spend more time and energy going around problems than in trying to solve them." - Henry Ford 

Courtesy of our friends at Rcube Global Macro, please find enclosed their latest publication where Cyril Castelli and Stéphane Alloiteau look at Global Financing Gaps and Credit Availability:

As our readers know, we closely watch corporates financing gaps. To have a better view than the classical capex minus cash flows, we substract the net equity issuance to the formula, since positive equity issuance adds liquidity, and viceversa for shares buybacks. Whereas this changes significantly the picture in the US, where corporate behavior in their own equity is meaningful, it has less of an impact in the rest of the world. Nevertheless, to homogenize the statistical data we are now following it closely in most G10 markets.

In the US, where the data has been available since the 1970s, we have shown how the non-financial
sector financing needs explained with a lead bank lending behavior and thus corporate credit spreads. In the final years before the subprime fiasco, we showed how exploding financing needs (rising capex, massive shares buybacks combined with weaker cash flows) preceded a U-turn in bank lending behavior, which in the end triggered the bust. Very rapidly afterwards, corporates shut down investments, issued equities, while cash flows started to recover. As a result, financing needs collapsed. Banks, reassured by the improved financial health of companies eased their lending standards.

A similar path is visible in the Eurozone.

Currently, Eurozone non-financial corporations financing needs are quite low. Investment has plunged while gross savings have increased.

As a consequence the EU financing gap (adjusted for net equity issuance) is quite low by historical standards, which should, in the end, translate into easier lending standards.

Contrary to the US where the non-financial private sector deleveraging implies an Equity outperformance, in Europe this is not the case.

It is nevertheless important to take into account the fact that financings gaps as we measure them are flow based. And that places where they have improved most significantly recently are also the countries where the stock of non-financial corporate debt remains the highest. France non-financial sector is in a critical situation with the highest financing gap, weakest corporate margins, weakening leverage ratios (debt/operating surplus).

While credit availability is improving for large companies, we all know that SMEs access to capital is much more difficult in southern Europe. Nevertheless, the credit channel in the Eurozone continues to slowly normalize.

In last week’s ECB Lending survey, this normalization process is visible.

On the household front, the same can be said, with demand for real estate loans rising close to turn positive.

In the UK, the credit channel is strengthening further, with credit availability for both households and corporates recently spiking. Demand is also picking up. The BOE survey is by far both in terms of momentum and levels the strongest of all. 

The IIF has just published its quarterly Emerging Markets bank Lending Conditions Survey.

There, the results are more worrying. Following a sharp deterioration in funding conditions, the overall bank lending conditions index moved back below the 50 mark, meaning net tightening.

The sharpest deterioration happened in Asia, where the overall index reached the lowest level since the survey started in Q2 2011. Asia lending index is the lowest of all regions. AFME is now just above emerging Europe in terms of credit availability.

The survey highlights the recent underperformance of EM assets. The credit channel in emerging markets is tightening again. It was our belief earlier in the year that it would improve on the back of easier international funding conditions, monetary easing and stronger global growth momentum. We were wrong.

We are now waiting for the US Senior Loan Officer Survey to be released, but it is unlikely to add significant news flow. It will probably reveal a very healthy credit channel, which has now been the case for a while.

To conclude, it appears to us that, regarding bank lending behavior, we can look at the world in three segmented zones. The US, UK and Japan, where bank lending behavior is strong and strengthening, the Eurozone where it is healing and moving in the right direction and emerging markets (except AFME and emerging Europe) and Asia in particular where it is now tightening again.

"There are no big problems, there are just a lot of little problems." - Henry Ford 

Stay tuned!

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