After the credit crunch - here comes the contraction

In due course, banks should begin to trust - and lend to - one another once more. But the shrinkage of the credit supply to small businesses shows no sign of a let-up.

The recent mayhem in credit markets that triggered the larger than expected Fed Rate cut and caused Mervyn King, Governor of the Bank of England, to volte-face, occurred because of unprecedented conditions that were so strained that major banks wouldn't even lend to each other. As a result of Central Bank intervention, that situation is improving although, by no means, are conditions back to where they were pre-August. Nonetheless, in due course, it is very likely that major banks will trust each other again and business, in those terms at least, will get back to normal.

The credit crunch is however, accompanied by something more sinister a credit contraction. There is no likelihood of any let-up of that condition. To give an example, only this week a client said that three of his friends who ran their own business, businesses that had been established for twenty years or longer, all suffered bankruptcy because banking facilities were unilaterally withdrawn. That's what a credit contraction is all about. In only today's Wall Street Journal there is an article headlined "Lenders cut credit for UK firms", Paul Hannon and Joe Parkinson explain that UK companies will find it harder and more expensive to borrow. This data arose from a Bank of England survey that was only released yesterday. The banks' first Credit Conditions survey found that banks and other financial institutions actively cut lending to companies during the third quarter and will do so even more sharply in the final three months of the year.

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