Monday, 23 February 2009

S&P Expects Further Slowdown in U.S. Credit. Spooky? Yes! Worrisome? Yes!

Standard and Poor's is betting on a further credit contraction in total credit available in the U.S. in the coming months. ''The popular belief is that U.S. banks have been unwilling or unable to lend due to capital constraints or a desire to avoid risk, leading to a credit crunch. But the data on credit outstanding in the U.S. has so far only tenuously supported the idea that the U.S. has indeed experienced such contraction in credit,´´ wrote S&P analyst Tanya Azarchs. ''While the amount of borrowing by the various sectors of the economy has continued to grow, albeit unusually slowly, there are early indications that a further slowdown is becoming apparent,´´ Azarchs wrote.

Her comments come as talk of a wave of U.S. nationalisations is gaining momentum. Many people argue a nationalisation is desirable for it may help kick start lending more rapidly. No evidence about it is conclusive. But the political response might have more effect on the industry than real capital support by the state -- which may not necessarily end the ills of the banking sector. Banks have to fail, consolidation should be allowed to operate freely, and new, non-state banks should be permitted to pop up. We have discussed this issue in the blog extensively, but there are aspects of it that must be better spelled out. In
the past nine months, loan growth has come at a slower pace than ever. That is worrisome. But the more worrisome thing for banks, in theory, is the prospect of further loan losses. This has been retarding lending, says S&P. Ninety-two percent of the sample of bankers interviewed for the Federal Reserve's Jan. 2009 Senior Loan Officer Opinion Survey found the increase in losses was an important factor behind the tightening of lending terms. The same survey found that capital problems aren't necessarily a key reason behind a retrenchment in lending. ''Loans are being replaced as they mature, but little net new growth is occurring. That could mean that the slowdown in lending is just an opening act, and a true credit crunch may yet take the stage,´´ Azarchs said. So, hold tight ... this might get worse.

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