The EU rescue package is good for business – or is it?

The headlines are promising and positive, the EU have reached a deal, or at least the framework for a deal, to save the Euro from cataclysmic failure. The FTSE 100 is currently up 3.3% on the deal and the threat of a deep and long recession has reduced, or so it is claimed.

Sadly, when you think beyond the headlines it is not all good news. As part of the deal debt holders, including European banks, agreed to write off 50% of debts owed to them by Greece.  Europe is providing no new money for the banks which are being expected to find the €115bn for this and the additional €20bn for the write-down of the Greek debt themselves.

Regardless of one’s views on the “fairness” of this and the role of the banks in the economic crisis, in practice this can only come from restricting lending, which will reduce the availability of finance to the private sector and exacerbate the growth slowdown.

The reasoning is simple, banks can only lend relative to their balance sheets, these have already taken a battering in recent years and these are going to be further hit by the write down in Greek debt.

Further, the amount they can lend against these balance sheets will be reduced due to the new capital ratios as governments look to de-risk the banks. Put these together and there is a double-pronged attack on the banks’ ability to lend to businesses.

The European bail out package does not affect British banks, however we operate in the European, if not global, market place for finance and credit. The supply of credit throughout Europe will be constrained leading to greater demand for borrowing from British banks to overseas companies.

These two factors will reduce the availability of funding to UK businesses. Add to this the massive amount of loans written in 2007 that are due for repayment (and redrawing) in 2012, and it is clear that competition for finance will be fierce and that the supply of it will be severely constrained.

In light of the above, if you are looking to raise finance you need to ensure that you seek this as soon as possible and that your business case and track record are excellent. What is more you should be prepared for increased costs of borrowing and tighter covenants.