AGENDA: Fiscal Discipline Is Key to Surviving Credit Crunch; Recent Business News Headlines Have Been Peppered with Talk of a Credit Crunch. Matt Waddell, Midlands Head of Corporate Finance at PricewaterhouseCoopers, Looks at the Current Market Conditions and Explains the Implications
Byline: Matt Waddell
Ask the average person what they understood by the term 'credit crunch' at the beginning of this summer and the chances are they would have given a puzzled response.
Six weeks on, it's been difficult to pick up a newspaper without reading a piece on the reduced availability of debt. But is all the talk genuine cause for concern or mere scare-mongering?
Newsprint on the subject of a potential credit crunch first began rolling off the presses this July with the terminology; concerns about the American sub-prime mortgage sector.
Understandably, it proved a forgettable concept for many, but is one that has played a pivotal role in the current state of the world's financial markets.
Sub-prime mortgages, effectively home loans to borrowers with poor credit histories, have become increasingly commonplace in the US in recent years.
Initially, the practice proved highly fruitful, increasing home ownership across the pond from 65 to 69 per cent.
However, following an unprecedented 17 consecutive interest rate rises by the Federal Reserve Bank, house prices began to fall and defaults on these loans began to spiral. This has driven a number of the major sub-prime lenders to bankruptcy.
So why should difficulties in the American housing market impact upon the wider financial climate?
The global financial system is intrinsically linked, with banks across the world buying complex packages of debt, including many from the sub-prime sector, which are dissected, repackaged and then sold on to hedge funds, pension funds and other investors around the world.
This has meant losses from the sub-prime sector being spread across the system, leading to significantly reduced funds in the debt markets and falls on stock markets.
In essence, this has meant a fundamental change in the dynamic of the supply and demand of debt. Gone, it seems at least temporarily, are the days of cheap and plentiful credit and rising asset prices.
But what does this all mean for the average small business in the Midlands? According to the Federation of Small Business, challenging times ahead.
Indeed a spokesperson for the organisation recently said he would "not be surprised to hear of more small business failures" as banks take a more cautious view on lending and pass on increased borrowing rates to customers.
Their concerns are echoed by David Frost, director general of the British Chambers of Commerce, which represents small to medium sized companies.
He said: "If big business is finding it more difficult to borrow, then clearly, investment decisions they make will be either slowed down or cut back. That will undoubtedly have an impact on smaller companies."
As such, with less debt available and banks much more cautious about funding it, the practicalities of the relationship small businesses have with their bank will be more important than ever.
In this respect, continuing to hold open and honest discussions with the bank regarding borrowing requirements will be key to small businesses unlocking the funds to fuel growth. …