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Feeling the crunch? Wait 'til you feel January...

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Paul Mason | 14:06 UK time, Thursday, 25 September 2008

I've been in Northern Ireland all day, speaking to small and medium-sized businesses about the impact of the credit crunch. It's incredibly mixed: there are some sectors that are just not going to be directly exposed - such as, if they are managing right, anybody whose main client is the public sector. Also the defence cluster and the globally-focused materials handling cluster seems to be surviving well.

But today was also the day Seagate hit the news with hundreds of job losses from its assembly plant. And I also heart some horror stories about what's small firms in the services sector, construction and the like, as a result of the credit crunch.

A bank manager described to me, generically and with no names, the way many firms' cashflow situation is worsening; how their access to even short term overdraft extensions is now curtailed and that, basically, there is - as HBOS found out - queue for credit and you don't want to be the last in that queue. The number of firms with unpaid invoices over 60 days is rising fast; so are overdrafts; you are also seeing credit insurance rising in cost.

I stress this is not yet the norm, but what everybody with a story to tell confirms is that it all started in June. This is the worrying thing...

June was the big fall off time in the economy and it has not bounced back. This has ominous overtones for the rest of the UK because this part of the world has a 2 week holiday in June, whereas much of England takes its holidays in late July and August.

People are not shouting about their credit situation in most of British business; they are tending to do it through industry bodies. For example we know that HGV drivers and building contractors are the most typical small traders seeking debt counselling, not because of their industry body but because of the debt counselling industry's intelligence.

Because I've spent two weeks bouncing around the soul-less caverns of lower-Manhattan, I feel out of touch with this story. It's all happening very quickly - and if you correlate the anecdotal experience with the charts you see it's all the result of the big spike in risk indicators in March/April, around the time of the Bear Stearns bailout. The bad news is that, last Friday those same risk indicators (I am using Dresdner's economics team's "ARPI" index) stood at double their peak around Bear Stearns - before falling back slightly on the bailout plan.

We will see next if the stalling of the bailout plan in Congress spikes the global risk and contagion indices even higher. If so, while small businesses are feeling a backwash now, that backwash is from a wave that struck in April; the wave striking now will mean a very bleak January for many in retail, services etc, even if the bailout goes through. If it does not go through in the next few days ... well I hope there is a good budget hotel in the city your jumbo jet has to divert to as it is foreclosed.

I'll be on Newsnight tonight to explain the latest compromise on Capitol Hill. My colleague Peter Marshall is on the scene in the US to watch the stunning spectacle of a presidential election put on hold.

Comments

  • Comment number 1.

    Paul, strongly suggest you get Tom 'The Idler' Hodgkinson on the telly - he has seen the future and it works, sorry, 'idles' ..

    A simpler life is coming for many of us - he is the guy to advise us on getting ahead of the curve..

    That Justin Rowlatt strand is now looking strangely prescient..

    But listen, there are worse things in life than having no money.. Like being massively in debt..

  • Comment number 2.

    the liquidity crunch is spreading. expect corporates to start hoarding cash as well, if the interbank market does not get unfrozen soon. no more working capital facilities. no more generous credit card terms. no more easy money for anyone.

    the real killer in the uk will be in the spring when the london property market will collapse in the absence for the second year running of the usual fillip from the city's (non-)bonus round.

    good time to own cash. assets will be going cheap. lucky for bankers who already paid down their mortgages..


    jj, dropped you a post on the carter glass thread

  • Comment number 3.

    On the specific question of unpaid invoices, I have long argued that there should be much stronger mechanisms for preventing this - either punitive interest charges or even legal sanctions.

    This is not new. Some years ago, a firm I was involved with came close to collapse because a filthy rich multi-national would not pay a modest invoice on the grounds that it was 'not budgeted for in the current quarter'.

    Only the threat of a PR disaster for them saved the day. Needless to say, we were paid but lost the client. Totally immoral.

  • Comment number 4.

    Never in the field of western finance has so much been owed by so many to so few.

  • Comment number 5.

    among the gallows humour about at the moment

    Heard at Canary Wharf: What’s the difference between a Lehman’s trader and a pigeon? A pigeon can still leave a deposit on a Ferrari.

    the finance model behind derivatives has been given the technical name of 'voodoo'.

    DARLING TO GUARANTEE ALL BETS ON THE 3.50 AT LINGFIELD [dailymash]

  • Comment number 6.

    Yep, and the most worrying aspect is that the Government has not got a clue about how to solve it.

  • Comment number 7.

    DEBT IN ALL SIZES - THE WESTERN WAY

    When I was in (small) business, I became very aware that raw materials were often traded in terms of credit length offered, rather than price. All companies needed bank-borrowing to fund the sales ledger. Rogue companies traded insolvent for a long period, hidden within extended credit, before going down; then great was their fall, often taking viable businesses with them. I realised that all it needed was legislation to outlaw OFFERING OR ACCEPTING 'terms' beyond 'x' days (to start at - say 90 - and be steadily reduced; with a timetable). Only the banks would have lost out and the shyster companies would have poked up as the tide went out. It doesn't take much thought to realise why this has never been put into law. All we got was the 'right' to charge interest on an overdue debt - a sort of legitimising of the scammers; and the pleasure of wasting time in a civil court if payment was flouted.
    Money doesn't talk - it keeps very quiet.

  • Comment number 8.

    Just saw the end of your report, with the terrifying graph of credit as a percentage over the last 100 years, on tonight's Newsnight, Paul. Could you post that graph and your explanation of its importance as an article on the BBC News website ? That will finally get even the dullest denialist to finally click that this really is global financial armageddon for those with debt.

  • Comment number 9.

    Other thing squeezing companies is inflation - see the recent report from Warwick Business School/morethan on small business inflation running at 9.9%/year. Life is not good.

  • Comment number 10.

    Paul,

    I caught your piece on Newsnight last night, with the tantalising analysis around credit levels and comparison with the 1930's. It seemed like the most important thing anyone said about this mess all week, yet you were given only a Warhol 15 seconds on it.

    The deep economics of this needs an hour-long special by you ASAP. Never mind this supposed depth vs. immediacy equation; we're getting all the irrelevant "Going Live" immediacy and none of the depth at the moment. Remember Reith!

  • Comment number 11.

    A little dicky bird has just informed me of something "unpaid invoice" related, that is a direct consequence of the credit crunch.
    The high street/mall chains all pay their rents to landlords, such as Landsecurities who also run a number of government accomodation contracts, of shopping centres on a quarterly basis. Convention has it that the banks lend these chains the money for the quarter commencing 1/10 and, are repaid on 1/1. This year, the banks have refused to do this. Consequently, the chains have been unable to pay their rents!
    In addition, the chains have got together and told their landlords that they are not going to pay their rents this quarter. The landlords, of course, will have no recourse to the courts until 91 days after the "invoices" fell due. Leaving corporations providing accomodation services to government themselves short of cash for the next three months at least.
    Heaven alone knows what will happen if the retailers have as a bad a Christmas as has been predicted. Will there be any high street chains or shopping centres left by the beginning of the 2009/'10 financial year?

 

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