Tags: El-Erian | tight | credit | loans

Pimco’s El-Erian: Tight Credit Threatening Global Economy

Monday, 05 Nov 2012 08:25 AM

Sovereign-debt concerns in Europe and in the United States grab headlines repeatedly though another credit crisis poses just as much as a threat to the global economy — tight credit for households and smaller businesses, said Mohamed El-Erian, CEO of fund giant Pimco.

Banks in the United States, Europe and elsewhere have been reluctant to lend to households, individuals and smaller businesses in wake of the 2008 credit crisis.

As a result, unemployment rates remain high and recovery suffers.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

“[T]he sovereign-debt crisis, which, given its national, regional, and global impact, has been particularly well covered. After all, sovereigns are called that because they have the power to impose taxes, regulations and, at the extreme, confiscation,” El-Erian wrote in a Project Syndicate column.

“But the other credit crisis is equally consequential, and receives much less attention, even as it erodes societies’ integrity, productive capabilities and ability to maintain living standards (particularly for the least fortunate). I know of very few Western countries where small and medium-size companies, as well as middle-income households and those of more limited means, have not experienced a significant decline in their access to credit — not just new financing, but also the ability to roll over old credit lines and loans.”

Unemployment rates remain high in the United States and though improving, the economy is not creating enough jobs to absorb those who have been out of work on top of younger Americans entering the work force for the first time.

Meanwhile in recession-weary countries such as Greece and Spain, unemployment rates have soared to around 25 percent, even touching 50 percent when to comes to Spanish youth.

“This is not just a matter of lost capabilities and rising poverty; persistently high unemployment also leads to social unrest, erosion of trust in political leaders and institutions and the mounting risk of a lost generation,” El-Erian wrote.

While sovereign-debt issues do deserve immediate action, most governments don’t have concrete plans to craft policies that would encourage more lending to households and smaller businesses.

The U.S. Federal Reserve, for example, has cut interest rates and pumped the economy full of liquidity to encourage more home buying, though banks remain wary of lending due to other factors such as fiscal and regulatory uncertainty.

“Proper access to credit for productive segments is an integral part of a well-functioning economy. Without it, growth falters, job creation is insufficient and widening income and wealth inequality undermines the social fabric,” El-Erian wrote.

“That is why any comprehensive approach to restoring the advanced countries’ economic and financial vibrancy must target the proper revival of private credit flows.”

In Europe, where the debt crisis is threatening the entire global economy, banks are tightening their purse strings even more.

A European Central Bank survey on small businesses recently found that more smaller companies applying for loans were denied.

“Access to bank loans continued to deteriorate,” the September-October survey found, with 22 percent reporting tighter availability of credit.

The loan rejection rate, meanwhile, climbed to 15 percent from 13 percent in April.

“This is the highest percentage since the peak of 18 percent in the second half of 2009,” the report said.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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