Signs of recovery persist in USA

For the whole of 2009 US corporate insolvencies have increased 40%. Crédito y Caución forecast a 5% decrease in insolvency levels in 2010 as the economic recovery continues.
Analisis Credito y Caución
Madrid - 02-mar-2010

In US, real GDP increased 5.7% in Q4 compared to Q3, according to an advance estimate by the US Bureau of Economic Analysis, representing the fastest quarter-to-quarter growth in the US economy since 2003. The recorded increase was driven primarily by private inventory investment, exports and personal consumption; the latter not unsurprisingly boosted by the holiday sales elements. An increase in private inventory investment is perhaps a sign that companies are preparing for an upturn, combined with a necessary re-stocking requirement. That said, expectations for GDP growth over the forthcoming quarters is tempered, with estimates of an increase of about 3% in Q1 of 2010.

According to the January 2010 Federal Reserve Senior Loan Officers Survey on Bank Lending Practices, commercial banks in general relaxed their lending standards on many loan types in Q4 of 2009. However, this is still relative to their earlier and highly restrictive attitude, and many are yet to unwind to anything close to pre-crisis levels. The net percentage of banks reporting tighter loan terms continued its downward trend from the peaks reached in late 2008 and into 2009. Nevertheless, many banks are still tightening their terms for business and household loans. According to the survey, banks reported that loan demand from both businesses and households weakened further in the last quarter of 2009.

Tightened credit standards and lower credit demand have translated into a marked decline in corporate and household lending. Growth in US corporate lending has fallen from around 20% in October 2008 to -17% in November 2009. Crédito y Caución expect that lending standards will remain tight, relative to pre-crisis levels, throughout 2010. Access to credit will remain a challenge to small businesses especially those serving difficult end markets such as automotive, construction, and those sectors where discretionary consumer spending drives revenue.

Whats more, in 2010 many consumers will face what could be potentially significant payment increments under Adjustable Rate Mortgages (ARM), raising fears of another wave of foreclosures as unemployment persists and those out of work for 12 months or more have already exhausted their savings.

Crédito y Caución believe that a sustainable trend of economic growth and an upturn in employment will be required to persuade many banks to relax lending standards to any significant degree. That means that, for the foreseeable future, the credit environment will certainly remain restricted.

Corporate insolvencies to decrease in 2010 as the economy picks up

For the whole of 2009 Crédito y Caución expect corporate insolvencies to have increased 40% to 60,000, with many small to medium sized businesses struggling in the wake of falling consumer demand and in an environment where bank facilities and lines were being tightened or pulled. Those businesses with an inflexible cost base, an inability to manage inventory levels effectively or an inability to generate organic cash flow, featured prominently among the casualties. Construction, especially new-build residential, will continue to struggle.

In December 2009, the Expected Default Frequency (EDF) indicator in the US again dropped compared to the previous month, by 19 basis points to 160, reaching its lowest level since October 2008. Crédito y Caución forecast a 5% decrease in insolvency levels in 2010 as the economic recovery continues: The International Monetary Fund (IMF) has recently revised its forecast for 2010 US GDP growth upwards to 2.7%.

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