8/2/2019 Le Crdit Crunch Isn't Over

1/2

Updated March 12, 2012, 8:56 p.m. ETLe Crdit Crunch Isn't Over

By FRANCESCO GUERRERAThe Italian industrialist looked the part. An elegant suit (I think I spotted "Canali" on the inside pocket), a

full mane of hair with enough salt in his pepper to make him look distinguished, and the polite manners thatcome from the proper upbringing and vast wealth.And yet, in our recent encounter, something was amiss. "I am not worried about us. We are big enough andwe'll be all right," he said. "But if our suppliers can't get funding from banks, we will all be in trouble."He was talking about the biggest elephant in European Union boardroomsle crdit crunch, il crunch, elcrunch. Whatever the language, not much is lost in translation: As the euro-zone economy slumbers inrecession and its banks shrink, companies are finding it harder to fund their operations and investments.

Christian Noyer is France's central bank governor.In the last quarter of 2011, credit extended by banks to euro-zone companies fell by 0.5% from a year

earlier, according to official figures, with countries like Spain, Portugal and Greece suffering steepdeclines.As the European Commission laments in its latest economic forecast, "credit expansion in the EU and theeuro area is bound to remain anemic in 2012."

The narrative of the European crisis has largely focused on governments, markets and financial groups.Corporations have been conspicuous for their absence, a strange development given that they are the maindrivers of economic growth, job creation and stock-market gains.

Last week's Greek debt deal may have allayed the darkest fears of a breakup of the euro, but the long, hardslog of rebuilding the euro-zone economy has to go through the factories and offices of corporate Europe.And they can't do it without banks.The potential for a credit crunch is more than a domestic European issue.Plenty of U.S. funds own shares and bonds of the Continent's corporate champions. As for Wall Streetbanks and private-equity groups, the predicament presents both risks and opportunities. They haveconsiderable exposure to those companies and will suffer if the situation deteriorates. But they can also winlucrative business by filling the funding gap left by their EU rivals.

Most companies, especially smaller ones, rely on bank lending to grow. In Europe, this is even more truebecause, unlike in the U.S., the majority of corporate funding comes from loans rather than capital-market

debt.The crisis, however, has left EU banks and companies with what Italians call "una coperta troppo corta"ablanket that is too short to cover their competing needs.Banks are under tremendous regulatory pressure to increase capital, clean up their balance sheets andreduce risk. That, in turn, has prompted them to tighten the lending spigot. Anxious to cover themselves,lenders have pulled the blanket away from companies.When the European Central Bank polled some 120 financial groups in January, more than a third said theyhad tightened lending standards in the previous three months, while nearly one in three predicted theywould make it even more difficult for companies to borrow in the first quarter of 2012.

To be clear, a surge in defaults among large European companies is unlikely because they tend to haveample cash reserves and can, by and large, tap the debt markets.Smaller enterprises, however, may face tougher times because they aren't as adroit at using capital markets

and they are the first companies to be ditched by banks when the going gets rough.

The good news is that the ECB's recent extensions of around 1 trillion ($1.31 trillion) in cheap loans tobanks across the Continent should help ease the funding strains of both lenders and borrowers. In theory,that is.Central bankers such as France's Christian Noyer have already urged banks to use the funds "to beproactive." But CEOs will have to balance those demands with equally powerful calls to curb risks.The European Commission, for one, believes that "the transmission from central bank liquidity to

additional loans to the private sector remains impaired."One man's impairment should, however, be another man's opportunity.

In a report released Monday, the Bank for International Settlements wondered whether "other financialinstitutions will be able to substitute for European banks as the latter continue to deleverage."

8/2/2019 Le Crdit Crunch Isn't Over

2/2

U.S. banks, which profess to be fighting fit with plenty of capital, should answer the call and look acrossthe Atlantic to deploy their funds. Private equity already is. David Rubenstein, Carlyle Group's co-founder,told a recent industry conference that Europe is "the world's greatest single opportunity."

It makes perfect sense: Unmet credit demand from companies should enable those with capital to chargeattractive prices and allow would-be acquirers to pick up bargains.It won't be risk-free, but it could be very profitable. The animal spirits of U.S. financial groups ought to

point them squarely in the direction of the corner offices of the Old Continent.Francesco Guerrera is The Wall Street Journal's Money & Investing editor. Write to him at:currentaccount@wsj.comA version of this article appeared Mar. 13, 2012, on page C1 in some U.S. editions of The Wall Street

Journal, with the headline: Le Crdit Crunch Isn't Over Just Yet.