Friday, June 13, 2014

Borrowing Constraints

The ECB is now determined to do everything to assist Europe's small businesses, short of actually helping them, of course. If I could borrow from the ECB at 0.5% I might well be tempted. After all, my chances of developing a product or service that would generate returns higher than 0.5% would be pretty good, even in this economy.

But of course, I can't borrow from the ECB - no SME can. We have to borrow from the banks the ECB is lending to, which introduces a bit of a 'middle man' problem. Indeed, Chris Dillow has debated recently whether we're past the point of needing banks any more in an age of deflation, negative interest  rates and bitcoin. I've speculated about the same thing myself recently.

There may though be a bigger problem than the ECB interbank rate or the role of banks full stop. That problem is the impact lowflation/deflation is having on the real cost of borrowing for businesses. I worked it out yesterday using Central Bank data for new business loan rates (covering the two biggest categories that make up about 90% of all business loans). If we subtract the Harmonised Index of Consumer Prices (HICP) provided by the CSO from the business loan rates we get the chart below:

What's worrying is that real interests have been rising for nearly eighteen months, after a three year period of decline. The bottom line: if the real costs of borrowing for businesses is running at more than twice the rate of growth of the economy, then you would want to be very optimistic - or very foolish - to borrow at those rates, especially if your business is focused on the domestic market (as most invariably are).

I wonder would the ECB consider a loan application?

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