Majority of firms believe crunch will hit in 2009

THREE out of five companies said the credit crunch was having an impact on business, but 78% expect the real crunch will come next year.

The figures reflect the views of 4,000 companies represented in an all island survey, carried out by BT and InterTrade Ireland.

With the housing slump already pushing the economy into recession, the reality is that the credit crunch, triggered by bad mortgage lending in the US which made international headlines on 7 August 2007, is compounding the difficulties of the Irish economy.

While it has not as yet been identified as a major issue for businesses, it has had a significant impact on consumer confidence, and raised concerns about the ability of our banks to ride out this withdrawal of funding that saw the collapse of ISTC bank in Ireland and mortgage lender Northern Rock in the UK, which had to be bailed out by the British government.

Speculation was also rife at one point that one of the four major banks was in serious trouble, and could go under.

Ever since the crisis broke, all of the big banks have been subjected to sustained scrutiny and speculation about the threat of serious bad debts over the next 18 months as conditions in the housing market continue to deteriorate.

In that context the credit crunch has undermined the credibility of the Irish banking sector and international investors have been heavy sellers of Irish financial stocks, whose values have been slashed by roughly 60% in the last year.

And for the first time in well over a decade, Irish banks are facing mounting bad debts and funding issues that have not gone away as this credit storm refuses to blow over.

Their bad debts relate to the collapse in housing, but the threat posed by the credit crunch has raised issues about their ability to meet their future funding needs.

The Central Bank insists the banks are well capable of living through this dual crisis of an economy in recession and difficult funding pressures, as banks feared being dragged into liquidation by a collapsing debtor bank.

Consumer confidence has also been dented by the credit crunch that has seen the terms of credit and borrowing criteria made much stiffer.

As a result consumer spending should stay relatively unchanged from the end of 2007 with a modest gain of 0.5% this year followed by a possible 0.5% dip in 2009.

To date the credit crunch has raised a host of concerns about the banking sector in Ireland and share prices have been decimated, but the real impact, apart from the hit to the stock market, looks to have been modest so far, with analysts attributing most of the slump to date to the hard landing that has engulfed the once thriving housing sector.

The big fear highlighted by ISME, the representative body for Irish owned business, is that credit may tighten considerably as companies report falling earnings.

Unconfirmed reports suggest that one bank has slashed the overdraft facilities to a substantial numbers of its small firm clients from €500,000 to €250,000 raising fears about their ability to survive in the long term.

Writing in his last economic review for Davy Stockbrokers, economist, Rossa White said: “One of our chief concerns is that bank funding will not be available to credit worthy businesses wanting to expand. This may impinge on our long-term potential”.

That concern was echoed by Mark Fielding, chief executive of ISME.

“Our fear is that as companies produce poorer results that banks will use that as an excuse to cut overdraft facilities.”

But overall companies are reasonably optimistic they can ride out these storms, he said.