Credit crisis worsens in Europe: Coface

The current credit crisis should be comparable in extent to the 2001 credit crisis, but lower than the three former crises (1973, 1982 and 1991), said Coface.

The credit insurer said worsening economic conditions are spreading throughout Europe but emerging countries’ resilience is lessening the spread of the crisis elsewhere. Coface predicted that the current crisis would last between 18 months and 2 years.

However, the credit squeeze is stronger than in previous crises, due to the very specific financial component of this crisis, according to the insurer. This increase in risk has led to a series of downgrades in country ratings.

Coface has downgraded the ratings for the United Kingdom and Ireland. Iceland has been downgraded from A1 to A3. Italy, France and Hong Kong have been listed on negative watch.

In a statement the insurer said: ‘A property crisis followed by a financial crisis has led to a palpable worsening of credit risks in the United Kingdom, Ireland and Iceland.’

‘In the UK there has been a marked increase in company bankruptcy (up 14% during the first half of 2008).’

‘In Ireland, the property crisis has spread to the whole economy, bringing about a recession. Company defaults rose by 75% during the first half of the year.’

“It is clear that the cost of credit insurance policies is increasing while the financial crisis moves to the real economy.

Xavier Denecker, managing director of Coface

‘And Iceland is faced with the collapse of its banking system on top of the downturn in the property market.’

Coface predicted increasing difficulties for companies in all three of these countries.

‘In Italy, company risks are deteriorating in a context of flat growth, rising costs and a credit squeeze.’

Coface noted a sharp rise in the amount of defaults by French companies, which are up 75% compared with a year ago.

‘The transport, construction and property sectors have been the first to be hit,’ said Olivier Cazal, Coface's underwriting manager for France.

Xavier Denecker, managing director of Coface in the UK and Ireland commented: ‘With the UK and Ireland entering recession, there is a growing awareness of credit risk among company executives and an increased interest in credit insurance. In troubled times, the failure of key customers can jeopardize the financial health of suppliers of goods and services. Credit insurance transforms the risk of catastrophic loss into a reasonable known cost. It is clear that the cost of credit insurance policies is increasing while the financial crisis moves to the real economy.’

See also: Fitch cautious on credit insurers as bankruptcies rise