Saturday, May 19, 2012

Eurozone corporate spending has stalled, repeating the situation in the US

Hello from Boston on this beautiful day. As tens of thousands students from the area prepare to graduate, jobs are on everyone's mind. But one important issue plaguing the US economy in the last few years has been limited corporate spending.

US firms have tremendous access to cheap debt capital but they end up hoarding much of the cash that is not used for refinancing, capex, or general expenses. Some companies pay it out in dividends or buy back stock. The Fed's effort to keep long-term rates low is yet to be translated into increased spending.

Hoarding cash keeps a lid on investment levels and limits new job creation. However it also maintains strong corporate balance sheets and low default rates. Spooked by recent global economic events, companies are simply uneasy taking incremental investment risk. It is not at all clear if this situation will improve in the near future.

Interestingly a similar situation has developed in the Eurozone. As the area banks stopped lending to corporations (which is not the case in the US), firms have tapped the bond markets. Bond issuance is a fraction of the US corporate market but has been open to the stronger Eurozone firms. The chart below compares growth in bank lending to corporate debt issuance.

Source: CS

To the extent Eurozone firms were able to tap the bond market or simply generate consistent cashflow, they have been accumulating this cash on their balance sheets - just as their US counterparts have done since 2009.

Source: CS

That cash hording is resulting in recessionary levels of corporate spending, stifling economic growth.

Source: CS

As tough as it will be for new college graduates in the US this year, the situation for those graduating in the Eurozone is going to be that much worse.
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