Fitch: EU Dependent on Russian Gas for Decade(s)

To say the economic ramifications and diplomacy around Russian force’s apparent violation of the Ukraine border/sovereignty is complicated may be the understatement of this decade. The behavior of Russia has become a sanction-worthy concern, at least in the minds of European leaders, there are reasons much of the EU is in such a precarious position. It all spells bad news for Ukraine and could impact the confidence of adjacent states.

A Fitch Ratings Report, “Living Without Russian Gas - Part 2: Replacing Russian Supplies in the Long Term,” argues Europe likely will be unable to significantly reduce its reliance on Russian natural gas for at least the next decade. Just as unlikely is a major reduction in demand because of a (hoped) European economic recovery will require more energy resources, not less.

As far as energy alternatives go, Fitch paints a bleak picture. Russia supplies more than one-quarter of all coal used in the EU and is the sole supplier of fuel rods used in nuclear-power generation, according to Fitch. Fitch analysts believe that green energy options, while held in high theoretical regard in many EU nations, are not near-sufficient enough to pull away from Russian gas. And, unlike the recent boom in the United States that is making it more independent and even a destination for manufacturing for the first time in decades as a result of cheaper energy, shale isn’t in line to be a saving grace for the EU either.

“European shale gas remains in its infancy, and we believe it will take at least a decade for production to reach meaningful volumes,” Fitch noted. “By that point, it would probably only offset the decline in production form Europe’s conventional gas well.”

In short, Russia will continue to be the power broker of energy in that part of the world. EU countries, notably Germany, taking a hard-line stance against Russian separatists or even Putin-led aggression in Ukraine face the real possibility of retaliation or worse, significant restrictions on the supply Russia releases to Europe. This obviously will play on the minds of European leaders should Russia continue to push its weight around in Eastern Europe.

- Brian Shappell, CBA, CICP, NACM staff writer

NACM’s Credit Managers’ Index for August Shows Consistency

The August Credit Managers’ Index (CMI) from the National Association of Credit Management provides reason to be optimistic about conditions for the rest of the year and should help quell fears of inflation.

Consistency is generally a positive development when the overall readings have been positive, and this is the case for the August report of the (CMI) “The August CMI reflects a more optimistic future, but not an economy that is likely to surge,” said NACM Economist Chris Kuehl, PhD. “In comparing this month’s reading to that reported by the Federal Reserve, it is easier to understand the optimism about the last half of the year, as well as the worry about the impact of inflation fueled by some of this growth.”

Many of the CMI’s categorical readings showed no significant change.  Areas like capital utilization and capital expenditure stand in stark contrast to the wild gyrations in the overall growth rate as first quarter numbers were in recession territory at -2.1%, while the second quarter boasted a gain of over 4%,” Kuehl said.

Consistency in the unfavorable factors, especially, suggests that none of the economic concerns that started the year have been sufficiently serious to drag the economy down. “The financial distress at the start of the year has not triggered a wave of business failure, and now that seems even less likely,” Kuehl said.

Concerning the manufacturing and service sectors, neither saw significant change in the overall index reading, though individual factors fluctuated more widely.


For a full breakdown of the manufacturing and service sector data and graphics, view the complete August 2014 report at CMI archives may also be viewed on NACM’s website at

Credit Ratings Agencies Face Tough Regulation amid Rules Release

The Securities and Exchange Commission has unveiled mandates designed to increase transparency and accountability in the credit ratings process.

An SEC release noted the new requirements will address areas like conflicts of interest, disclosure of credit rating performance statistics, standards from training/experience/competence of credit analysts and procedures to protect integrity at agencies, most notably Moody’s Investors Service, Fitch Ratings and Standard & Poor’s (S&P). The various new rules will become effective during the 2015 calendar year, some as early as January 1.

The rules are part of the ongoing implementation of the Dodd-Frank Act, passed in response to various problems (quick ending of industry bubbles, widespread risk-taking, insufficient regulatory oversight) that led to last decade’s massive recession. Congress has often scapegoated the so-called “Big Three” ratings agencies, particularly S&P (which once reduced the US’s “AAA” credit rating and publicly chided Congress for partisan gridlock while doing it), for poor performance in the run-up to the crash.

Agency officials, while noting they are still reviewing and analyzing some of the new mandates, said they will comply in full and, in theory, support the idea of a facelift/update on rules of the road governing raters.  

- Brian Shappell, CBA, CICP, NACM staff writer

For a detailed information release and fact sheet released by the SEC, click here.

2014Q2 Small-Business Credit Conditions Improve to Record

The weather-related retreat in small business credit quality earlier this year is firmly in the review mirror, according to newly released quarterly statistics.

The Experian/Moody’s Analytics Small Business Credit Index, which tracks credit conditions at firms with fewer than 100 staffers, increased by 2.4 points to a level of 112.2 for the second quarter of 2014. Outstanding credit balances saw a 4.8% quarterly uptick, and delinquency rates fell to 9.3 % (previously 9.7%), said Experian/Moody’s analysts. The picture going forward also tends to be brighter than would have been thought even weeks ago, as tensions in the Middle East and Eastern Europe began to mount.

“Risk to the outlook have shifted to events overseas and have become less threatening,” the index’s executive summary noted. “The positives outweigh the negatives, and the blossoming economic recovery will benefit small business’ finances and, hence, credit quality in the second half of 2014 and beyond.”

Among the biggest positive movers in credit quality by industry from the first quarter of the year to the second were construction and transportation. The latter of which may still dubiously boast one of the highest industry delinquency rates, but its quarterly improvement was considered notable and promising by Experian/Moody’s.

Worth watching, however, is the sometimes massive difference in credit quality between various US regions, as some areas are showing major struggles.

- Brian Shappell, CBA, CICP, NACM staff writer

New Home Sales Stats Temper Last Week’s Housing Excitement

There was hope last week that a  a trio of real estate data releases from the public and private real sector, as well as from housing’s prominent trade association, showed the residential real estate sector – and construction along with it – was turning a corner. But Monday brought a slap of reality to remind everyone that housing, like it has been for most of the years since the start of last decade’s Great Recession, remains volatile.

The Commerce Department’s statistics on new single-family home sales tracked at 412,000 in July. That represented a surprising 2.4% drop from June, which had been revised upward since last month’s results. While sales remain above July 2013’s total by 12.3%, the latest statistics paint a considerably less rosy picture of the pace of the housing recovery than did recent analysis from the National Association of Home Builders, Wells Fargo, Home Depot, the National Association of Realtors (on existing-home sales only) and other monthly government-tracked economic indicators.

- Brian Shappell, CBA, CICP, NACM staff writer  

New Brazil Stimulus: Economy-Booster or Inflation-Driver

There is nothing like an election to focus the mind of the politician and so it has been in Brazil. The regime of Dilma Rousseff is in trouble and that has prompted an all-out effort to boost the fortunes of the economy with waves of cash.

The Brazilian central bank is dumping another $4.5 billion into the system through lowering the reserve ratios for the banks. It is not clear if this will really have the desired impact as access to money has not been the major issue for small and medium-sized business. The hope is that there will be a little bump in the economy, and that it will be sufficient to get support back in the Rousseff camp.

The real worry is that all this largesse will only worsen the already apparent inflation problem, something Brazil has been forced to combat numerous times in the past after a prosperous period. The target as far as inflation is concerned has been 4.5%, but the average over the last year has been between 6% and 8%. The expectation is that this surge of cash will drive the rate above 8% again.

- Armada Corporate Intelligence

Antitrust an Increasing Issue When Doing Business in China?

Antitrust can difficult to navigate for credit managers and sales staff alike, especially when doing business internationally. The Chinese government is lending credibility to such beliefs as it seems to be lashing out at companies in various industries, most noticeably the important auto-parts supply chain.

In recent days, China’s National Development Reform Commission began targeting automotive parts manufacturers from Japan to the European Union to the United States, alleging mass breaches of antitrust law via price fixing. The worst of it to date seems to have fallen on Japanese manufacturers. A fine total exceeding $200 million (USD) was levied upon various competitors from Japan during the most recent round of enforcement. The highest individual fine for alleged price manipulation of parts in the supply chain went to Sumitomo Electric Industries.

The best known brand name to be hit in recent days for alleged antitrust violations was European pace-setter Mercedes-Benz, owned by Daimler AG. Those alleged violations were tied to both parts pricing and high maintenance costs in China.

It remains to be seen how far Chinese regulators will go: if they are targeting just a few key industries in the short term or if they are testing the waters for more widespread crackdowns on the argument that it is protecting its consumers. Enforcement, just or otherwise, has escalated noticeably since China revamped its antitrust statutes late last decade. 

- Brian Shappell, CBA, CICP, NACM staff writer

Construction Firms Get Triple-Play of Positive News

To say construction firms, whether seeking credit or providing it on products that go into building, have been desperate for consistent good news would be an understatement given the depths of the industry’s fall during the recession and slow rise since. This week brought the best batch of news in some time.

Within the last week, there has been positive news related to the residential real estate/construction industry from three very different sources: a government agency, a joint study produced by trade association and financial institution and a publicly-traded company’s earnings statement. It kicked off with news from the Commerce Department reporting that new, residential housing starts increased by more than 15% in July.

A monthly index compiled by the National Association of Home Builders and Well Fargo  focused on homebuilder confidence landed at a level of 55 in August, up two points from the previous month. That marks the second best level in seven months, with fewer threatening seasonal concerns ahead than were apparent during the year’s harsh first quarter.

Finally, Home Depot unveiled earnings this week that soundly beat market estimates. Company officials pointed to residential real estate, both new home construction and existing home renovation, as an impetus for the surge. Officials also predicted during the earnings call that revenues and profits would escalate at an even better pace during a majority of 2014’s second half because of this area. Given where housing has been since 2007, it’s not every week that such a rush of positive news comes in all at once.

- Brian Shappell, CBA, CICP, NACM staff writer

UK Growth Continuation a 180 from Returning EU Struggles

The euro zone may be struggling to get back on track as Germany falters, but the economy of the United Kingdom is still moving in the right direction even if it is not yet firing on all cylinders at this point.

Growth in the second quarter tracked at 0.8%, about as expected. There was a little more strength in the first quarter than had been registered earlier. The annual rate of growth has been upgraded from 3.1% to 3.2%, and that has become the envy of the Europeans. The majority of this growth has been from the service sector that has been booming at the low and high end of the scale while manufacturing is still at a somewhat below-par performance. Much of the issue with manufacturing is the weakness in Europe, as this has affected the demand for British output. The US has been buying more, but that didn’t rise to a level offset the loss from the European market.

Still, the UK numbers could almost be described as spectacular compared to the data coming from Europe, but that hardly means there is no fragility or precariousness for its ongoing recovery. The consumer in Britain is back to some degree, but the confidence surveys don’t suggest that this engagement can be counted upon to survive bad news. The trends are in the right direction for now. But there is fear is that the possibility of another round of austerity measures would reverse these gains --  that has many watching the Cameron government for clues even as The Bank of England appears determined to keep the economy growing with lower rates.

- Armada Corporate Intelligence

Fed Roundup: Auto Doing Fine, Rates Going Nowhere for Now

A new report out of the Federal Reserve Bank of New York illustrates that the automotive industry, which has long been fueling the success of the manufacturing sector, has yet to slow down. Meanwhile, historically low federal funds rates look to be safe, according to a Fed official based in Minnesota.

The New York Fed’s “Q2 2014 Household Debt and Credit” study illustrates that demand for auto loans continues to surge despite any concerns related to the economy. Auto loan debt increased by $30 billion since the first quarter of the year and by $91 billion since Q22013. “We observe continued strength in the auto loan market with the largest volume of originations since 2006,” said Donghoon Lee, senior economist at the New York Fed.

Meanwhile, this week’s speech by Federal Reserve Bank of Minneapolis President Narayana Kocherlakota originally intended to focus on community banking strayed into the greater economic outlook. Kocherlakota, a member of the Federal Open Market Committee, said the Fed was far from reaching its targets for price stability and remained confident that inflationary pressure will be low for a number of years. In that, he strongly hinted that the target for the federal funds rate – now at a historic rock-bottom range between 0% and 0.25% -- was unlikely to be to see an increase anytime within the next year. It reiterated predictions made in surprisingly transparent FOMC statements of the recent past.

- Brian Shappell, CBA, CICP, NACM staff writer