Czech companies complain credit crunch has begun

Czech companies are complaining that they are already being hit by a credit crunch with banks reluctant to lend them money. Meanwhile, the Czech National Bank has warned that the situation could get even worse for firms and households trying to get loans or already heavily in debt.

Czech National Bank

The current snapshot of the credit situation comes from a survey carried out by the Czech Chamber of Commerce for the business daily Hospodářské noviny. It showed that 55 percent of the 761 firms questioned said they had faced bigger problems getting loans over the last six months. Just over half said that banks demanded tougher conditions for loans; around half said they had been forced to postpone investments as a result and three quarters said they had laid off workers due to the credit squeeze.

The paper reported that particular tough credit conditions appear to have been slapped by banks on now struggling sectors such as construction and haulage.

Adam Geršl is an economist at the Czech National Bank and helped write its annual report on the stability of the domestic financial sector which was released on Tuesday. The report makes reassuring noises that the Czech financial sector is largely free from the toxic assets and foreign currency loans that have blighted other banks during the financial crisis. And he says that credit crunch might be overstating the situation at the moment.

“So what we are probably seeing is credit rationing where good companies get credit on quite okay terms and some more risky projects, more risky firms, have more problems asking for loans.”

But if companies and households thought the worst might be behind them, the Central Bank report warns there could be worse to come. It says there are already signs of a slowdown in loans to business, although less severe than in some other European Union countries. And it also detects a chill in the previously booming Czech property market. Prices for houses and flats showed real falls in the fist three months of the year.

The central bank drew up three “stress” models for the immediate future of the Czech economy and banks ability to weather the storm. Under the most likely, the number of problem loans facing banks could rise from 3.5 percent at the end of 2008 to around 8.0 percent by the end of this year. The problem would start to ease as economic growth picks up again from 2010. Under the worst case model, the Czech economy could shrink by 6.2 percent, bad loans would rocket and home prices could fall by around a third.

And the national bank warns that the Czech economy risks being hit by a second crisis wave. Mr Geršl again:

“Bad loans accumulating in banks motivate banks to enter a sort of credit crunch – to stop supplying loans. That would again worsen the economic situation. Of course, attempts in the central banks and in international institutions to quantify this affect and assign a probability is very difficult. It is currently subject to research by many acknowledged researchers in finance and economics to model this feedback affect and this sort of negative loop.”

That second wave could stem from continued low demand in Western economies hitting the heavily export-oriented Czech economy.