IP 2008-2009Leon

Competencies of SME's in the transforming environment of the enlarged Europe

Post Credit Crunch Europe

Impact on Small and Medium Enterprises (SMEs)
A macro- and polito-economical approach
by Norbert W. Knoll - Dornhoff, Dr.jur.et Mag.rer.soc.oec.

I. Nature and reasons of Credit Crunches

1. Definitions
2. Analytic tools, e.g. Bubble Economy
II. Financial Crisis and Credit Crunch in Europe
1. Underlying reason for Europe’s vulnerability
2. Regional impact on SMEs
3. Video clip Interview with an Investment Banker - Discussion
III. Polito-economical responses
1. European Union (with video clip)
2. Individual European Countries´Responses
3. European NGOs
4. Forecasts 2009 - 2010
IV. Worldbank - Ease of Doing Business (SMEs) - Getting Credit
V. Students playing Finance Ministers simulating reforms and
seeing instantly the changes in international ranking of the
Countries.
(An interactive game - Students and Lectors)
I. Nature and reasons of Credit Crunches
1. Definitions

a) Micro, small and medium-sized enterprises (SMEs)

This category is made up of enterprises which employ
fewer than 250 persons and which
have an annual turnover not exceeding
50 million euro, and/or an annual
balance sheet total not exceeding
43 million euro.’
Extract of Article 2 of the Annex of
Recommendation 2003/361/EC

Micro, small and medium-sized enterprises

(SMEs) play a central role in the
European economy. They are a major
source of entrepreneurial skills,
innovation and employment. In the
enlarged European Union of 25 countries,
some 23 million SMEs provide around
75 million jobs and represent 99% of all
enterprises.
b) Credit crunch Definitions

* A state in which there is a short supply of cash to lend to businesses and

consumers and interest rates are high
Source: wordnet.princeton.edu/perl/webwn

* A credit crunch is a sudden reduction in the availability of loans (or

"credit") or a
sudden increase in the cost of obtaining a loan from the banks,
investors etc.
Source: en.wikipedia.org/wiki/Credit_crunch

* A period of economic recession in which credit and investment capital

are difficult
to obtain, causing a shortage of liquidity
Source: en.wiktionary.org/wiki/credit_crunch

* A period when there is a sharp reduction in the availability of finance

from banks
and other financial institutions, particularly from small ...

Source: www.ampcapital.co.nz/corporate/glossary.asp
2. Analytic tools, e.g. Bubble Economy

a) Elements of and predictive monitor for a financial

crisis
Leading indicators of a financial crisis
Weak exports, excessive import growth, and currency overvaluation could lead to deteriorations in the current
account,
and historically have often been associated with currency crises in many countries. External weaknesses and
currency
overvaluation could also add tothe vulnerability of the banking sector since a loss of competitiveness and the
external
market might lead to a recessi on, business failures, and a decline in the quality of loans. Banking crises could also
lead to
currency crises.

Taking at least one statistical measure from each of the Leading Indicators with
high
predictive value, the existence of multiple signals and a relatively low signal to
noise
ratio, analysts end up with these:

1. Currency exchange rate, deviation from trend (27.5%)

2. Trade balance/GDP, 12 month rate of change (18.7%)
3. Foreign liabilities/foreign assets, deviation from trend (12.1%)
4. Ratio of M1 to trend (11.7%)
5. Dollar/yen/EURO exchange rate, deviation from trend (8.6%)
6. World oil price, 12 month rate of change (7.3%)
7. Foreign reserves, 12 month rate of change (5%)
8. Stock price index, 12 month rate of change (5.3%)
Financial crisis predictive monitor, short & long term graphs
(gold added,in light blue, with 1/3 the importance of currency

he early warning line is based on a 13 week change rate instead of an annual change rate)

Further informatgion and inquiries are available under:

http://www.nowandfutures
.com/index.html
mailto: editor@nowandfutures.com
b) Methods of psychology

Inclusion of human tendencies by methods of psychology

Example:
Greed / Fear Index
A tentative index to help track relative fear in the various markets. The gold
price is shown for reference. The algorithm behind the index is proprietary, but
some of the inputs are the gold price, the VIX, various sentiment indexes and
CBOE options data.
II. Financial Crisis and Credit Crunch in
Europe
1. Underlying reason for Europe’s vulnerability

Some crucial issues (A)

a) The underlying reason for Europe’s vulnerability is rooted not in the

U.S.
subprime — that is only the proximate trigger — but instead in the
importance of banks to the entire European economy.

b) Wholly unrelated to exposure to American subprime, Europe’s

banking
vulnerabilities can be broken down into three categories: the broad
credit
crunch, European subprime and the Balkan/Baltic overexposure.

c) The euro’s adoption granted this low interest rate environment,

which
normally only a state of Germany’s strength and heft could sustain,
to all of
the eurozone. This easy credit environment echoed by affiliation to
most of
Some fundamental findings (B)

d) Underneath the global credit crunch looms the second problem: the
European
subprime crisis. cheap credit for the first time. The subsequent real estate
boom
Spain built more homes in 2006 than Germany, France and the United
Kingdom
combined — led to the growth of the banking and construction industry.
Banks pushed
for more lending by giving out liberal mortgage terms — in Ireland the no-
down-
payment 110 percent mortgage was a popular product.

e) The poorer, smaller and newer European countries gorged the most on this
new
credit, and none gorged more deeply than the Baltic and Balkan countries,
leading to
the third problem: Baltic and Balkan overexposure. Growth rates
approached 15
percent in the Baltics, surpassing even East Asian possibilities — but all on
the back of
borrowed money

f) Fueling the surges were Italian, French, Austrian, Greek and Scandinavian
banks.
2. Regional impact on SMEs

In all European Countries banks are currently hesitating to extend

loans and guarantees to larger companies with more than EUR 50 M
annual turnover (chart).

SME will 2009 face continuing restrictions in Countries who have

recently been

a) downgraded by S&P in their credit rating (Ireland and Greece) or

which came under the threat of “credit watch” (Spain and Portugal -
Italy likely to follow, or
b) Countries with bad ranking for 2008/09 by the Worldbank Group
“Ease of Doing Business” - Category “Getting Credit” for SMEs (e.g.
Czech Republic, Greece, Hungary, Italy, Spain, Portugal)
Some regional highlights:
* Republic of Ireland

Davy Research says that with property such a big component of Irish credit and the economy in
recession, everything suggests that credit will start to shrink Irish PSC (Private Sector Credit) growth
continues to look respectable on a year-on-year (yoy) basis with growth in October (2008) running at
9%. However, focusing on yoy numbers misses the turning points; month-on-month (mom) trends are
therefore much more important to us at this juncture.

* Greece

Downtrend To Accelerate In 2009

Greece remains one of the more resilient eurozone economies in the midst of the global credit crisis.
However, we expect it to be fully caught up in the regional downturn in 2009. The country will be hard
hit by the worldwide collapse in shipping activity, as this industry has been at the core of the recent
growth spurt. Furthermore, the crucial tourism sector will suffer next year, while domestic
consumption and investment is also likely to stagnate. We are concerned about the structural
weaknesses and imbalances that are built in to the Greek economy, most evident in the gaping
current account deficit and chronic public debt burden. Political stability is also under threat. These
flaws leave Greece as a clear outlier in the eurozone bloc, and act as a major deterrent to investors.
The soaring risk premium now charged for Greek bonds is testament to this problem, and will leave
the country highly vulnerable during this economic crisis.
Regional highlights continued......

* Spain

Pressures on Spain´s public finances and slowing projected growth rate prompted S&P to
place the country on credit watch. The rating agency forecasts that Spain´s general
government deficit “stay well above” 3 per cent until 2011 and peak above 6 per cent in 2009

* Eastern Europe

Most economists forecast growth in the region of 5.5% to 6% in 2008, which is slower than in 2007, but still
considered robust. This is still a fast-growing region with strong fundamentals (EBRD). The Baltics and
Balkans remain particularly dependent on foreign capital to finance their huge current account deficits

EBRD recognises "high levels of current account deficits, high exposure to foreign borrowing and political
uncertainties in some countries“. Given that the roots of this latest global slowdown lie in tighter credit
conditions, it is impossible to ignore the impact of weaker capital inflows on regional prospects.

One of the reasons is that the performance of Eastern Europe will be largely determined by the eurozone
economy. The countries of Central Europe look particularly exposed to a sharp slowdown in the euro zone:
if growth in the single currency area dips to 1.5%, Hungary could slip into recession.
Dec 2008
European Economic Recovery Plan - EERP
The European Economic Recovery Plan, equivalent to about 1,5 % of
the GDP of
the European Union (a figure amounting to around EUR 200 billion).
The plan
provides a common framework for the efforts made by Member
States and
by the European Union.

The EERP refers to SMEs as follows:

i. As regards action by the European Union, the European Council

supports in
particular:− an increase in intervention by the European
Investment Bank of
EUR 30 billion in 2009/2010, especially for small and medium-
sized
enterprises, for renewable energy and for clean transport, in
particular for
the benefit of the automotive industry, as well as the creation of
the 2020
European Fund for Energy, Climate Change and Infrastructure
("Marguerite
Fund") in partnership with national institutional investors;

ii. a temporary exemption of two years beyond the de minimis

threshold for
State aid in respect of an amount of up to EUR 500 000 and the
adaptation of
the framework, as required to increase support for enterprises,
especially
SMEs, and full implementation of the action plan for a Small
Business Act
adopted by the Council on1 December 2008;
European Union - continued.............

b) “Small Business Act" for Europe

Adopted in June 2008, the "Small Business Act" for Europe (SBA) reflects the Commission’s political will to
recognise the central role of SMEs in the EU economy and for the first time puts into place a comprehensive
SME policy framework for the EU and its Member States. It aims to improve the overall approach to
entrepreneurship, to irreversibly anchor the “Think Small first” principle in policy making from regulation to
public service, and to promote SMEs’ growth by helping them tackle the remaining problems which hamper
their development. The Small Business Act for Europe applies to all companies which are independent and
have fewer than 250 employees: 99% of all European businesses.

Facilitate SMEs’ access to finance

The European Investment Bank Group will increase its range of financial
products offered to SMEs, particularly mezzanine finance. In addition,
more funds will be made available by the Commission for micro-credit and
access to cross-border venture capital will be facilitated.

Late payments can be crippling for SMEs. To simplify existing provisions

and ensure that SMEs get paid within 30 days, the Commission is
proposing a revision of the Late Payments Directive.

Source: http://ec.europa.eu/enterprise/entrepreneurship/sba_en.htm
C) European Portal for SMEs (http://www.accesstofinance.eu)
Competitiveness & Innovation Framework Programme
Video clip - success stories http://www.sme-finance-day.eu

/index.php?id=7
2. Individual European Countries´Responses

Economic stimulus packages in European Countries

http://www.tagesschau.de/wirtschaft/konjunkturprogramme102.html