The Eurozone Crisis is Starting to Affect US Lending

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The Eurozone money crisis currently affecting Europe has started to impact US bank lending. This news comes after the latest survey of 50 loan officers at the Federal Reserve. How could this affect overall debt in the US?

As the economy begins a slow recovery, credit conditions improved for awhile. That has come to a dramatic halt, with only five of the domestic banks (out of 50 surveyed) reporting relaxed standards for lending to large companies. Two domestic banks out of the 50 have tightened their conditions on lending.

US branches of foreign banks have shown a sharp reduction in lending, with nearly a quarter of them tightening their terms and raising interest rates. They have also cut back on the amount and length of time that they are willing to lend money.

This is because they are seeing the weaker economic outlook as it relates to their immediate future. They are not willing to take the risk of lending money as this weakens their own liquidity.

The survey highlights one of a few ways in which the Eurozone crisis could affect the US. At present, it is only affecting businesses and banks, but if it spreads to personal banking, debts may rise.

In the survey, US banks were asked if they had put any special conditions on lending to European banks and companies - a whopping 56% said that they had. The flipside of this is that the European banks and companies will not be able to afford loans, or would face heavy restrictions on the terms of any that they could secure.

If the economic crisis in the Eurozone worsens, we may see the bankruptcy of multiple companies as they begin to struggle. Obviously bankruptcy is the final straw for any business, and it would consider this only after possible buyouts, redundancies, or layoffs and that ultimately affects the people.

This may not happen, of course, as there have been rumors that the Chinese are set to help the European Financial Stability Facility (EFSF – the euro area’s bailout fund), but so far this has not come to fruition.

What would be the outcome if China were to bail out the Eurozone?

  • More representation at the IMF?
  • More market economy status?
  • Commercial investment?

The Eurozone cannot afford to be seen “selling” such things so openly, but what options do they have right now?

And how would that affect the US?

For an awesome infographic that explains the Eurozone Crisis, visit the Payplan blog.

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