How the Sovereign Debt Crisis Affects Business  15 Mar 2012

The past week has brought two further developments in Europe’s ongoing sovereign debt crisis. Firstly, a second bailout of Greece has finally been agreed. European governments and financial institutions were able to agree a rescue package for Greece based on austerity measures and commitments made by its government, following a successful bond swap. However this was seen as an orderly ‘default’, which would likely be followed by the need for a third bailout.

Secondly, the outlook on Britain’s AAA credit rating has been reduced from stable to negative by the credit ratings agency Fitch. This follows a similar decision by Moody’s a month ago. Britain’s economic outlook may be adversely affected by the sovereign debt crisis in Europe, and economic conditions within the UK may challenge the government’s ability to maintain its austerity measures.

The sovereign debt crisis began in late 2009, and is a follow-on effect from the Credit Crunch, which started a year earlier. Governments which increased borrowing heavily in the boom years found that in the new negative economic climate, tax revenues were decreasing while expenditure particularly on welfare was increasing. It became increasingly clear that some governments would find it difficult to refinance their debts, leading to the risk of defaults on sovereign debt.

Government bonds, or "gilt-edged" stocks, have traditionally been seen as a safe and secure form of investment. However, as a result of the sovereign debt crisis, these investments are regarded as increasingly risky, as the credit ratings of one country after another have been downgraded by credit ratings agencies. This has highlighted the growing importance of credit ratings agencies, which are seen to pass judgment on the creditworthiness of entire nations with increasing regularity.

While this appears to primarily affect certain nations and large financial institutions, it does in fact have an impact on ordinary businesses both large and small:

Financial institutions threatened

Banks and investment funds which are heavily exposed to sovereign debt may be in danger of collapsing. This would affect those with investments in those institutions and weaken the financial system as a whole.

Investor confidence damaged

As what was thought to be safe investments turn into bad debts, this weakens the confidence of investors both within Europe and abroad.

Availability of credit

Credit to businesses, which is already in short supply, is reduced even further by the knock-on effects of the sovereign debt crisis. Also, higher costs of borrowing for governments due to credit rating downgrades could make loans more expensive for everyone.

Economic outlook

Export markets in Europe are threatened, and weakened consumer confidence at home reduces the demand for goods and services. The possibility of a “double dip” recession looms.

Reduced business confidence

All of this affects the climate in which business decisions are taken. Uncertainty about economic prospects causes businesses to make decisions which are more cautious and less bold.

Need for accurate information

In these times of uncertainty, it is increasingly important to have accurate information about the financial status and creditworthiness of companies with which one is doing business. Whereas when times are good, companies’ creditworthiness might be taken for granted, decisions in the current economic climate require a closer scrutiny of these companies.

bizzy.co.uk offers affordable solutions to help businesses have accurate and up to date information on companies’ creditworthiness. Signing up for a bizzy FREE account gives access to a range of useful information and a basic credit rating for every company. Subscribing to a bizzy PLUS account at modest cost provides comprehensive credit scoring and financial information on any company in the UK, as well as a regularly updated and verified website bizzyRATE badge to display creditworthiness to others, including customers, suppliers, lenders and investors. This represents excellent value for money, and is one decision which can surely be taken with great confidence!

Posted in bizzy blog on 15 Mar 2012.