At this week’s Finance, Credit and International Business Association’s (FCIB’s) Annual International Credit and Risk Management Summit in Prague, two FCIB members—Angela Bradbury, ICCE and Daniel Van Damme—were presented with its distinguished Service, Development and Growth (SDG) Award.

Bradbury, group credit and payable manager with Innospec, Inc. in the United Kingdom, and Van Damme, group working capital manager with Tessenderlo Chemie SA in Belgium, joined the short list of SDG award winners. Van Damme serves as the chairperson of the Chemicals Industry Group and Bradbury serves on FCIB’s European Advisory Council and is a frequent conference speaker, taking part in the Prague summit and scheduled to present at next week’s Credit Congress in Las Vegas.

“They have tirelessly worked to educate their staff, to really contribute and give back into the international credit community,” said Noelin Hawkins, FCIB director, Europe, The Middle East & Asia. “I can’t recall anyone working harder.”

The award is designed recognize the valuable contributions volunteers are making to further grow and develop FCIB’s member services and to encourage more people to serve. The first winner of the award, Mannes Westhuis, LL.M., CICP, Bierens Debt Recovery Lawyers, also eloquently described it as something that represents a win-win situation for today’s international credit-related professional: getting in touch with customers and information on leads, while “being socially and professionally responsible.”

- Brian Shappell, CBA, CICIP, NACM staff writer

All eyes have been on Spain when it comes to nervous businesses owners, credit professionals and other market-watchers wondering when the next European sovereign insolvency is going to occur. And while it would be overly optimistic to assume that danger wasn't imminent in Spain, a top four economy, by size, on the continent, another nation may beat it to default: Slovenia. At least that was the sentiment at FCIB's Annual International Credit & Risk Management Summit in Prague.

“Slovenia is far riskier than Italy or Spain,” said FCIB panelist Silvina Aldeco-Martinez, managing director of Risk Analytic Products, Standard & Poor's. She noted that, unlike Spain, it's not overall risk throughout many sectors; it's just massive problems in its banking sector.

Freddy Van den Spiegel, of BNP Paribas Fortis, agreed that Slovenia may slide into insolvency and that Spain faces many issues. Because of the nature of the problems and size/importance of its economy to the EU, Spain's filing, should it occur, would be a significantly bigger event. He said the prospects for Spain continue to generate pessimism because its high unemployment (25% among the young) shows little signs of improving because the nation doesn't have solid products and brands to make them competitive and, thus, pull themselves out of the rut. The big problem therein is that France, once hoped to help the recovery financially as much as Germany, holds so much Spanish debt.

“If it happens, we'll see what happened in Cyprus: panic,” the Belgian-based economist said. “If Spain gets into trouble, then France comes onto the radar”

All that said, Van den Spiegel still believes the European Union and the common currency will survive, but in a setting of more centralized EU power both in lawmaking and on the part of the European Central Bank.

-Brian Shappell, CBA, CICP, NACM staff writer

The European Union, continuing to struggle with a debt crisis among many of its members, had a busy if not surprising week of action. In a move that smacked of killing-the-messenger, the EU put significant restrictions on how, what and when the three biggest ratings agencies in the world could publicly assess the sovereign credit ratings of its member nations.

The EU's head-turner came in the official form of a reprimand against the “Big Three” ratings agencies (Moody’s Investors Service, Standard & Poor’s and Fitch Ratings), all of which are based in the United States. The EU is fast-tracking legislation that restricts the timetable in which any of them could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or “malpractice” on the agencies’ part. Some call the move an attempt at improved transparency and competence, while others liken it to censorship.

The three credit ratings agencies were criticized heavily for their performance in ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued criticism as the agencies routinely lowered ratings of and put on warning high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain)—all of which since proved to have deep-rooted fiscal issues, mind you—and, more recently, former economic powerhouse France, which saw its prestigious “Aaa” rating downgraded a step by both S&P and Moody’s in 2012. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.

- Brian Shappell, CBA, NACM staff writer

Rarely has a warning from a ratings agency been so thinly veiled as Tuesday’s message from Moody’s Investors Service.

In its “Update of the Outlook for the U.S. Government Debt Rating,” Moody’s noted the United States’ coveted “Aaa” sovereign credit rating, now in a “negative” outlook category, might take a hit and see a downgrade if increasingly partisan lawmakers continue their failings to work together on budget and debt issues. among others.

“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government's Aaa rating and negative outlook,” said the Moody’s report. “If those negotiations lead to specific policies that produce a stabilization and, then, downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable. If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1.”

Moody’s added the U.S. is unlikely to keep a “Aaa” rating if it can’t convince the agency with its actions to change its “negative” outlook setting. 

During an FCIB members-only teleconference this week with FCIA Vice President/International Economist Byron Shoulton, he noted that getting Democrats and Republicans to work together was of paramount importance.

“(Last year’s) downgrade, while controversial, was a necessary signal that needed to be sent,” he told FCIB members. “Until opposing political ideology accept that compromise is a must, recovery will be difficult in the U.S.” He added that the political gridlock and gamesmanship is having a negative impact on everything from bank lending to consumer and business confidence. He suggested that whomever wins the November presidential election would be well served to extend the olive branch to the other party in a hurry.

“Whoever wins the election is going to have to pull out all the stops for financial growth,” he urged.

-Brian Shappell, CBA, NACM staff writer

(Note: For more information on FCIB membership and to gain information on a replay of Shouton's economic outlook, visit www.fcibglobal.com).

"Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0% to 0.25% and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."

Source: The Federal Reserve

In Japan, the largest manufacturing bankruptcy in the nation’s history was declared this week as Elpida Memory Inc. found its liabilities in the neighborhood of $5 billion far too great to overcome without restructuring. The computer memory chip manufacturer, once a big part of a booming exporting industry dominated by Japan, has had trouble keeping up with foreign counterparts. The bulk of that competition, driven by lower costs, comes from outfits in South Korea, primarily Samsung.

Also not helping the Elpida and its contemporaries is that its chips are used for computers and laptops, not necessarily the growingly popular smart phones/devices like the iPhone/iPad and similar products. Additionally, the overvalued yen, which has become a bit of a magnate as investors leave the unstable euro, has made it harder for Japanese-based exporters to compete and threatens Japan’s long-held trade strength. As such, Japan, never known as a country where corporate bankruptcies were very likely, could be seeing its fortunes change … and not for the better (see more on this topic in a feature in the latest, March issue of Business Credit Magazine).

In Greece, the ratings agencies have struck again. This time Standard & Poor’s have downgraded Greece into the sovereign credit rating category of “SD” or selective default. Given its troubles, any action of the kind – once thought to be a virtual bomb in the markets – strikes as less than shocking. Said S&P:
“Greece's retroactive insertion of Collective Action Clauses materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring…we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange.”

In Ireland, a potential snag in the latest European Union effort to force the tightening of member states’ proverbial belts is emerging. Prime Minister Enda Kenny announced this week that, as per Irish constitutional mandate, a public vote must be held to ratify the proposed EU treaty that calls for tougher debt limits, limits that almost certainly will force more, unpopular austerity in the debt-rattled  nation. For his part, Kenny said he plans to sign the treaty as a show of support he believes, at least in part, is necessary for an ongoing economic recovery for the EU. It is worth noting the neighboring United Kingdom was one of only two members voting against the treaty, but it’s also not on the euro as its primary currency.

(Note: Check out this week’s eNews, out Thursday, for more breaking and news for credit and financial professionals. www.nacm.org).  

Brian Shappell, NACM staff writer
 

The most realistic response to that question is probably “couldn’t hurt”. President Barack Obama’s speech Thursday night was close to what had been leaked in the days prior and, as such, it was about as bold as it could be under the current circumstances. That does not mean that this is the plan that will shove the U.S. economy back towards recovery, but there is little in the plan that could be judged controversial either. It was a speech that was long on inspiration and cajoling yet somewhat short on what could be construed as drastic remedy.

The challenge that faces the political establishment right now has been pretty clear for months. The two biggest economic issues require actions that are diametrically opposed to one another. To fix the debt and deficit the government has to impose a strict austerity plan that would involve severe cuts, revenue hikes and all manner of actions that would also result in a slowed economy. For evidence of what austerity means to a given economy, look no further than what has been taking place in Great Britain and other European nations. To shock a $15 trillion economy into substantial growth will take far more than $450 billion, especially when half of that amount is in tax cuts as opposed to direct stimulus.

The plan was as much about tax cuts and incentives for business as it was about new spending initiatives, and that was by design. This was a plan designed to be as palatable as possible to the GOP. This doesn’t means that Republicans will pass it swiftly or at all, but it will be much harder for the them to oppose this idea on its face as half of the plan involves tax cuts for which Republicans long have been advocating for.

As one would anticipate, there is substantial difference between the opinions of those who would call themselves Keynesians at heart and those who come from the more conservative side of the debate. There is also some level of consensus when it comes to some key points. The majority held that tax cuts will not really do much until later in 2012 and that too little of the plan is short-term while too much of it will manifest in 2012, at the earliest. The view of most economists polled was that the plan was better than expected in terms of balance and size but that it was still far too limited to have much of an impact.

There will be far more evaluation of the plan in future weeks but for the moment the economists fall into three camps on the plan. The first group essentially is committed to the notion that the government has to suspend concern about the debt and deficit until the economy is back on a healthy growth curve. The second group of economists hails from the more conservative side of the debate and wants the focus to stay on debt and deficit reduction over all else. They assert that austerity has to be the focal point despite the very real pain that comes from such an effort. Then there is the third group that takes the position that something is better than nothing. They agree with both of the other positions in part: with the first group in asserting that it is too little to make a real difference and with the second group that it makes the debt and deficit issue that much harder to deal with.

Source: NACM Economist Chris Kuehl

The highly anticipated speech by Federal Reserve Chairman Ben Bernanke at an annual symposium held in Jackson Hole, WY, yielded little in the way of new information. Instead, the chairman avoided the issue of another anticipated stimulus program (quantitative easing/QE III), played the part of cheerleader for long-term growth prospects and even needled a Congress, one that has been so critical of the Fed, over its woeful handling of the debt ceiling/budget debate.

Bernanke reiterated to the annual meeting about Federal Reserve montary policy held by Fed Bank of Kansas City the message the Fed has only recently started admitting: that the recession was much deeper than originally thought and the recovery was going to continue to be slower than anticipated and hoped. Much of this can be tied to the ongoing housing market woes and their impact on household wealth as well as employment levels. Still, Bernanke spent much of his speech wearing proverbial rose-colored glasses:

“Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if--and I stress if--our country takes the necessary steps [such as more proactive housing and monetary policies] to secure that outcome. Economic healing will take a while, and there may be setbacks along the way. However, the healing process should not leave major scars.” Bernanke boasted of the U.S. economy’s diversity, traditional strong market advantages, entrepreneurial culture and technological leadership, as well. However, the Fed chairman did touch on worries for the not-so-distant future: health care costs, entitlements of an aging population and a K-12 school system that “poorly serves a substantial portion of our population.”

In what appeared a thinly veiled shot at Congressional lawmakers, Bernanke noted U.S. businesses and consumers “would be well served by a better process for making fiscal decisions:”

“The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses…fiscal policymakers could consider developing a more effective process.”

Brian Shappell, NACM staff writer

The overall economic narrative in the country for the last month has been a question as to whether the latest run of bad economic news is a temporary phenomenon or is the harbinger of much worse to come. As many analysts have asserted that this is all attributable to the earthquake and “Arab Spring” as those who assert a double-dip recession is setting up for as early as the third quarter. Most of the economic community is somewhere in between, but much of the interpretation lies within the latest run of data, and the National Association of Credit Management Credit Managers’ Index (CMI) for June suggests the temporary impact position has some validity.

The dramatic collapse reflected in the May CMI eased up a little in June. The index numbers bounced around, but these variations were obscured somewhat by the fact that the index as a whole was flat. Considering this month, it is very apparent that the devil is in the details. The overall index number was exactly the same as it was in May—54.2—but there were significant changes in the combined sub-indices for favorable and unfavorable factors.

“The most distressing news comes from the number of credit applications received and the amount of credit extended,” said Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. Many businesses seemed more cautious in the last month or so. Part of this is still related to the issues in Japan and the fear of higher commodity prices, but there is also some growing unease regarding political games. “Few really believe that the United States would put $100 billion at risk in its securities market by not raising the debt limit, but there is intense fear that Congress will take the game too far and provoke a reaction in the markets before it reaches an agreement,” Kuehl said. “It appears this trepidation is affecting the willingness of businesses to expand and seek additional credit. The good news is that sales have risen during this period; in the past, expanded sales usually beget more credit requests and more credit extended.”

The bad news in favorable factors has been balanced out by good news in some of the unfavorable factors. Many signs of distress weakened a little. There were fewer disputes and fewer dollars beyond terms. While there were also fewer bankruptcies, there were still concerns about the number of credit applications rejected and the number of accounts placed for collection. “The overall impression is that there is some separation taking place between those companies that have weathered the last few years and those that had been counting on an economic breakthrough to help salvage their financial position. This is a development we’ve referenced before and the pattern is still evident,” said Kuehl.

As the recession gives way to a slow recovery there is a series of expected moves from the different players in a given industry sector. The market leaders start to anticipate the end of the downturn, and they are ready to ramp up and make an attempt to grab market share from rivals. The best-prepared companies make the first moves forcing competitors to try to keep pace. Some do, but others begin to falter as the business they expected to cover their investment fails to materialize. Right below the market leader category is the market challenger and they are looking for the weak link among the market leaders. They push with their own expansion schemes in an attempt to supplant them. If they calculate correctly they make the jump; if they do not they fall back and start to struggle with cash flow. Right behind the leaders and the challengers are the market followers and they are waiting to see how the bigger battles play out before they choose which approach to emulate.

“Right now the economic recovery is waiting for the market followers to make their move. This is the biggest category of business—and the most cautious,” said Kuehl. The CMI data suggest that this sector is starting to have more active sales activity, which generally provokes more credit demand. The majority of credit requests have been coming from either the most important customers with the best credit or from those struggling on the bottom tier. “When the middle levels start to get earnestly engaged is when there is potential for more general overall economic growth.”

The online CMI report for June 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

This month's Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) reveals a tale of two economies and two strategies. There is continued good news in the index with sales and credit availability, but there is some very bad news as far as the toll this economy has had on business thus far. An impressive growth in sales pushed the number well into the 60s with a reading of 66.3-the highest since the recession started in 2008. Credit applications experienced the same growth, rising to 60.3 after having slipped to 58.6 in January. This number is also the highest since 2008, suggesting that companies still expect growth and are taking steps to get ready. The good news continued with dollars collected, which improved from 60.9 to 63.4. And, finally, there was good progress in the level of credit extended-an increase from 64.8 to 66.5.

The sum total of all this positive trending is an improvement from 62 to 64.1 in the favorable factor index. "What then is the problem?" asked Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. "Why is overall growth in the CMI non-existent? The 56.4 reading this month is the same as last month despite the good numbers."

This is the vexing part of a transition economy, said Kuehl. This is the time that companies move aggressively to capture market share due to the sense that the consumer is starting to engage-an assumption reinforced by overall economic numbers. The retail sector finished 2010 stronger than expected and the last set of data from the Purchasing Managers Index (PMI) show substantial gains in both the manufacturing and service sectors. Consumer confidence is up as well. These are the signs everyone has been waiting for, but they are not the signs of a fully recovered economy.

This situation creates the same pattern every time. The strongest competitor in a given market, the market leader, starts responding to anticipated demand with more capital investment, some hiring and additional marketing. That provokes the market challengers in that sector to respond in kind to maintain their edge. Right behind them are the market followers that also have to react to the moves of those in the dominant position. It is a chain reaction driven by the need to hang on to market share-a race that some companies are better positioned to enter. They are the ones that can wait for the recovery. Those that are not sitting on enough cash have no choice but to make investments and hope that the timing is right.

One of two things will happen to these companies. If the timing is right, the investment will pay off. The anticipated demand will manifest itself, and the cash flow will be there to handle the investment and credit requests. If the timing is off or if the company is forced to respond to the competition sooner than preferred, the debt soon becomes brutal and business failures ramp up. This is the signal sent by this month's index. The two negative factors showing the biggest increase were bankruptcies (falling from 59.1 to 56) and accounts placed for collection (moving from 52.5 to 49.9). Other indicators deteriorated as well. In the end, the declines in the unfavorable factors dragged down the combined index and left the CMI flat for the month.

This part of the transition out of a recession can be the most brutal. Companies barely hanging on could survive if there is little additional pressure. Now with the competition starting to heat up, these struggling companies are left with poor options. They either just accept the loss of their market or they gamble on their ability to hang on. If they guess wrong, they get into trouble soon. It is now a matter of how patient creditors can be and the point where credit managers must really show their skill at reading businesses. If they restrict an account to reduce exposure, they strain the relationship and may lose that customer should it rebound. If they give too much and the company goes under anyway, they have lost a lot of money and could put their own company in some peril.

The latest set of polls and surveys reinforce the message that has been coming from Europe as a whole for several months: the German economy is confident and growing.

The surveys of business, investors and consumers are all converging to send the same message that the German economy is strong, getting stronger and instrumental in dragging much of the euro zone economy along with it. Just as important is the fact that not every nation is getting a chance to hang on to the German coat tails, which will present some issues in the months ahead. Germany's latest PMI data is coming from a "flash" index based on surveys of about 2,000 businesses. The statistics are not as reliable and complete as the bigger PMI studies released in a week but, thus far, have been pretty solid indicators of what is to come. The latest number is 55.2, and its new business index hit 55.4, a 39-month high for that sub-index. This is also well above last month's level - 53.9. That suggests growth has been consistent and poised for more rapid acceleration in the months to come. That assumes that the European Central Bank (ECB) is not forced to start acting against inflation. Even should that develop, the German economy appears to be better insulated than those in most in Europe partly due to the ongoing ability of its business to diversify their market position.

It is widening the gulf between the Germans and the rest of Europe that worries many. At the same time that confidence in the German economy has reached a 20-year peak, the attitudes in the financially strapped nations have weakened. The new order numbers in Ireland, Portugal, Greece and Spain have fallen to five-month lows, and there is little expectation that conditions will improve before the end of the year or perhaps into 2012. The rate of joblessness has improved in Germany, but the Eurozone as a whole likely will hover around 10% for the bulk of the year. It may even worsen as the various austerity plans start to get serious.

Analysis: The division between the nations that are coming out of the recession and those still mired in the crisis will create some very awkward moments in the near future. Start with the potential moves the ECB will feel compelled to take if inflation becomes the issue they fear. The Germans and the French will demand that the rates be hiked sooner than later despite the potential to cripple the recovery efforts in the worst hit nations. The already strained unity of the European Union will be pushed to the breaking point. The last thing these states want is to see the Euro get stronger at the same time that debt is harder to accumulate. The Germans and other healthier economies will be under even greater pressure to bail these nations out. That will hardly be a popular political decision. Such division fuels those who question the ability of the Euro itself to survive the crisis. At present, the powers that be are saying the right thing about the Euro and the need for euro zone unity. However, the diverging nature of economic growth will put the whole system to the test unless the rise of the German and French economies is enough to haul some of the others out of the abyss.

Source: Armada Corporate Intelligence's Strategic Global Intelligence Brief