European business beggared by banks

February 7, 2012 | Last updated on February 7, 2012
1 min read

European governments are not the only players struggling with debt. With European banks reluctant to lend to businesses in need, a majority of the region’s companies are also scrambling to pay their bills.

The result: companies will be forced to take drastic action, further weighing on the European economy.

“There’s a lack of business confidence across Europe” said Jonathan Loynes, chief European economist in London at the research organization Capital Economics. “Lending to the private sector is deteriorating, and there’s enormous stress on the European economy.”

A recent survey released by the European Central Bank showed that institutions reduced the credit available to companies in the third quarter of 2011, and banks revealed they would pull back even further in the last three months of 2011.

Insolvency is expected to rise 12% this year in the euro zone, and countries including Greece, Spain and Italy are expected to record the highest annual increases as well. In contract, the number of insolvencies is falling in the United States.

Without the financial lifeline banks can offer, debt-laden businesses in Europe are running out of options. The economy is weighing on their future prospects and some companies are selling assets and cutting investment to conserve cash.

Economic troubles are also wreaking havoc on corporate profits. As Europe grapples with recession, unemployment continues to rise, and consumer confidence is plunging along with manufacturing orders.

Read more about the crisis facing European companies.