U.S. exporters brace for cutbacks in European bank lending

The European Central Bank’s decision Wednesday to offer loan help to the region’s financial institutions was closely watched by U.S. companies, which have extensive ties to troubled European markets.

Boeing warned that European banks would cut lending to companies that buy planes. Pharmaceutical companies Pfizer and Bristol-Myers Squibb have said cash-strapped European governments that provide health care are cutting what they spend on drugs. And other U.S. exporters to the region, such as almond farmers, medical equipment manufacturers and car makers, must brace for the possibility that a European recession will depress their sales.

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“If there is a financial meltdown in Europe, the trouble at AIG and Lehman will seem like just a warm-up act for the real crisis,” said economist Ed Yardeni, president of Yardeni Research, formerly with the Federal Reserve.

U.S. stocks were mixed Wednesday after the ECB’s action, with the Dow Jones industrial average and the Standard & Poor’s 500 indexes notching very small increases but the NASDAQ falling 1 percent.

The crisis for European banks, which are under pressure to reduce their portfolios, is making it more difficult for companies and investors around the world to secure financing. Reacting to new regulatory actions that require them to shore up their balance sheets, banks across Europe are seeking to slash more than $1.2 trillion in assets over the next two years, according to data compiled by Bloomberg.

As the European banks hunker down, the shrinking of loans is expected to have effects around the world. Yardeni said some hedge funds he advises have lines of credit from European banks.

“Those have been cut off,” he said.

European banks are also expected to pull back on financing aircraft, a key U.S. export to the region. About three-quarters of the $40 billion in financing that was provided in 2011 to buy commercial aircraft around the world originated with European banks, according to Boeing’s estimates.

A number of those institutions “will reduce their financing of airplane purchases during 2012,” Boeing said in a statement. “However, we expect other financing sources — namely export credit agencies and the capital markets — to step up support to ensure that sufficient financing is available to meet increased customer demand.”

The reach of the European banks is broad and can have startlingly large effects in the United States. Many economists have singled out the high savings rate in Asia as a source of much of the easy money that fueled the boom and bust in the U.S. economy in recent years, but a new wave of research implicates the expansion of activities by European banks as well.

“The culprit for the easy credit conditions in the United States up to 2007 may have been the ‘global banking glut’ rather than the ‘global savings glut,’ ” Hyun Song Shin, a Princeton University professor, said in a noted lecture last month. “The picture that emerges is of a substantial amount of credit being extended to U.S. borrowers by the European banks.”

Given the importance of European banks in U.S. financing, Shin warned that the ongoing crisis in Europe will have “far-reaching implications” for the supply of credit in the United States.

Moreover, some exporters are bracing for a recession in Europe that would significantly reduce demand for U.S. products. U.S. exports to Europe are led by aircraft, cars, pharmaceuticals and other chemicals.

U.S. exports to the region have not recovered to their pre-recession levels, said Emilia Istrate, a senior research analyst at the Brookings Institution who specializes in exports. The European Union was the destination of 24 percent of U.S. exports in 2010, she said, making it by far the largest export market. Canada, by comparison, accounted for 16 percent.

“The financial crisis in the euro zone couldn’t have come at a worse time,” she said. “We are still reeling from the effects of the recession.”

President Obama’s export initiative, announced last year, set a goal of doubling exports by the end of 2014 to help rescue the economy. “It becomes much more challenging to reach your export goal when your main market is plummeting,” Istrate said.

 
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