The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
For a company, credit rating depends on two things, the likelihood of the debt not being repaid (a default) and the extent to which the lender is protected in the event of a default. It's about level of risk, the higher risk the country, the lower the credit rating. The highest rating is AAA and this represents quality indicating the capacity to repay interest and principle is extremely strong. This week it's been reported Britain is in danger of losing its triple A status. Moodys and Fitch have put the rating on a 'negative outlook' while Greece's rating has improved to B-, Fitch's first uplift in rating since 2003.
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
everything will be fine when market experience good stable growth. even the credit rating comes as a problem when the market confidence is lost. it sometimes make me think a question that do companies perform well by their fortune they have at a particular period?
ReplyDeleteSpain's credit rating has been lowered today (27th April 2012) by two points to BBB+ by S&P and there's a risk of more downgrades to come. More support for their banking sector is likely. The unemployment is at record levels, around 23%, mainly because of the housing crash which resulted in less construction jobs, 50% of young people are out of work.
ReplyDeleteThe impact of the reduction in credit worthiness for Spain is that they will have to pay more for their finance because they are now classed as being more risky. It hasn't come totally out of the blue, it was predicted that Spain would suffer further during the discussion surrounding Greece.
This week the news reported that Britain is back in recession, GDP was down 0.2% down from January to March this year and because it was down in the previous quarter also, that constitutes a recession. Here too construction is being highlighted as a factor although if only makes up 7% of the UK economy. Stephanie Flanders of the BBC described the economy as 'flat', rather than being in recession, and 'flat' is how it feels. There's a plodding feeling about spending. We run our own business and it's been tough but at the moment it's very tough in comparison to what we've been used to and I think that's the issue. We've been used to boom times for so long, it's hitting us hard. All of us.
While there are those companies and markets which are doing ok, even expanding, they are usually linked to the fact that people have less to spend, like the battle over second hand clothes. Cash4Clothes are expanding this year with plans to open 50 new shops and local councils want in on the action because the price paid for a bag of second hand clothes has increased from £220 per tonne to £650 since 2007 (FT Weekend). The economy is changing, I'm not saying Cash4Clothes will save us all but there needs to be a clever focus on potential, those activities which benefit the masses; where the market is bigger and most in need. I suspect garden supplies outlets are doing well also because everyone wants to 'grow their own' and be green and economic. And after all, the people who can afford to spend at the higher end, can still afford to spend at the higher end.
Source BBC News website
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