Why businesses are living with long-term credit woes: Gottliebsen

The sharp fluctuations in US and European sharemarkets over the last week in response to oil price speculation underlines the fact that governments around the world will be need to be very careful in how they handle the delicate business confidence flower in the next 12 months as stimulation is wound back.

And that also applies to large areas of Australia, although because we have low government debt and a mining boom we have much more flexibility.

Although the underlying trends in the US and Europe are going in the right direction we should prepare ourselves for volleys of bad news. And Australia could also be affected by similar forces.

That was my conclusion from yarning over the weekend to Sara Mathew, global Chairman and CEO of Dun & Bradstreet, who is visiting Australia.

Dun & Bradstreet monitors trends in credit and corporate delinquencies and what they are seeing in some developed nations is not that pleasant.

In the United Kingdom more than 75% of trade credit payments were late in the fourth quarter of 2010. For most major economies in Europe more than 60% of payments were late, and in countries like Spain and Italy late payments were particularly bad. The one European exception was Germany, where more than 60% of payments were made on time.

In the case of the United States, Dun & Bradstreet warns exporters to prepare for payment terms that exceed 30 days and may run as high as 90 to 120 days. In the US, corporate delinquencies, which had been falling with the recovery, suddenly rose in the December quarter.

US businesses slowed their payment of debts as they relied more on suppliers’ credit – usually because they were not being paid by their customers.

Given that the US is awash with money as part of the QE stimulation, these are not good omens.

Mathew says that the fact that so many US home owners still have negative equity in their homes is holding back consumer expenditure and contributing to corporate difficulties.

In Australia, despite the strength of the economy, business failures increased by more than 23% year-on-year as business-to-business payment terms deteriorated. The number of firms who were severely delinquent in their payments (90 plus days overdue) increased by more than 7% in the December quarter of 2010.

Part of the global problem is that the capital required by banks for business loans makes them less attractive and the new Basel banking requirements will make the situation worse.

None of these trends isolated by Dun & Bradstreet on their own will reverse economic upturns but if events turn nasty because of an adverse situation (like the Middle East) then they will multiply the effects.

This article first appeared on Business Spectator.