EQUINOX
GLOBAL
NEWS
WINTER/SPRING 2012
2012 – A Year of
Credit Contraction?
As we enter 2012, all eyes are on the
health of the European banks. If there
is to be recession and an increase in
corporate bankruptcies, the banks will
be the mechanism through which pain
is transmitted.
What is it about banks that give them such
influence over the economy? It is because their
actions can either ‘create’ or ‘destroy’ money.
Imagine there is a king, a banker, and
ten people on a desert island. The ten people
come ashore with 10 gold coins in each of their
pockets – 100 gold coins in all. The banker
and the king come ashore with nothing. The 10
people immediately deposit their coins with the
banker. The king is unhappy not to have any
money so he approaches the banker for a loan.
The banker reasons that the 10 people will not
all ask for their money back at the same time,
so he lends 50 coins to the king.
Something odd has now happened. If you
were to get all the 10 people together and ask
them how much money they have, they will
tell you 100 coins in total. But if you ask the
king, he thinks he has 50 coins as well. So all
together, the people behave as if they have
150 coins between them. The banker has
‘created’ money.
The king uses his money on public spending
for the islanders, and everyone feels surprisingly
wealthy with this arrangement. When the
king keeps asking for more money, the banker
leverages himself further and further by lending
more and more of the coins. Each time a
new loan is made, the banker ‘creates’ more
money and everyone feels even more wealthy.
Eventually the banker has lent out 96 of his
total stock of 100 coins. The islanders behave
as if they have 196 coins in total, and can’t
believe their luck. They get used to this
comfortable situation over some years.
What is it about banks
that give them such
influence over the
economy? It is
because their actions
can either ‘create’
or ‘destroy’ money.
Equinox Global has an established team with
over 150 years of trade credit experience
between them. As part of the Lloyd’s family
Equinox Global can offer the expertise,
experience and security that has kept Lloyd’s
at the head of the international insurance
market since 1688.
But one day the king approaches the banker
with the bad news that he is having a sovereign
debt crisis and cannot pay it all back. The
banker has a panic attack because he cannot
now pay the people the money he owes them.
The people are angry with the banker and tell
him he must not be so leveraged in future.
They make a rule that he cannot lend out more
than 80 of the coins at any one time. But as the
banker reduces the aggregate of his loans to 80
coins, the islanders behave as if there are only
180 coins around, instead of the 196 coins they
were used to. The people can’t understand why
it feels like there is no money around anymore,
and there is a big recession. The banker has
‘destroyed’ money.
Our imaginary desert islanders’ situation
illustrates how, even if money is backed by gold,
a bank can seem to ‘create’ or ‘destroy’ money.
But since the demise of the ‘Bretton Woods
arrangement’ in 1971, money has not been
backed in any sense by gold. These days money
is not even a paper promise – it can just be
some digital code on the computer of a financial
www.equinoxglobal.com
Equinox Global Ltd
A FORCE FOR CHANGE IN
THE TRADE CREDIT MARKET
institution. Banks can ‘create’ or ‘destroy’
money with a few strokes of a key pad.
What then is money today? It is actually no
more than faith and belief in the minds of its
users – hence the word ‘credit’.
For example, if a bank were to email us all
telling us that the credit limits on our credit
cards were doubled, some of us may behave as
if money has been ‘created’. All this means that
banks today can have a much bigger impact
on the overall economy than our desert island
banker, whose promises were backed by gold,
ever could.
Banks will be reducing their leverage during
2012 – they will probably end 2012 with less
credit exposure on their books than they had at
the start of the year. It will feel like there is less
money around.
All financial institutions, even credit insurers,
have a similar effect when they grant, or take
away, credit limits. That is why bulk credit limit
cancellations by credit insurers make it feel like
there is less money around in the real economy.
Some credit insurers may reduce their overall
credit exposure during 2012, and to the extent
this happens they will be adding to effect caused
by the banks.
What then is money
today? It is actually
no more than faith.
A key challenge for any credit insurer is to
manage the economic cycle, which means being
cautious when the environment feels good (but
is potentially about to collapse), and to push
forward when the collapse becomes reality and
capacity is more in demand. The good news for
2012 is that some credit insurers will be doing
this, swimming against the tide, expanding
their aggregate credit lines during the year,
and helping to mitigate the effects of any limit
reductions.
Sutherland House 3 Lloyd’s Avenue London EC3N 3DS
T +44 (0)20 3036 0523
Letter from Paris:
2012 – A Dangerous
Year for the French
Economy
The accumulation of uncertainties and
worries – presidential elections, the loss
of the S&P AAA credit rating, the Euro
crisis, the refinancing problems of the
major French banks, potential tougher
fiscal measures, the increase of unemployment, the slow down of activity –
is expected to cause a large reduction in
investment and consumption. This will
impact the business environment and
provoke a material increase of the
number of insolvencies.
During the 2008/2009 crisis, the number
of insolvencies in France peaked at about
64,500 – nearly equivalent to the sum of the
UK insolvencies plus the German insolvencies
combined during the same period. There has
been some improvement but unfortunately this
improvement stopped after the summer of last
year and the trend for an increase has started
again. Most of the experts are predicting that
the number of insolvencies in 2012 will be
equivalent to the 2009 peak.
What is the impact for the French trade credit
insurance market? During the 2008/2009
crisis, the French government injected massive
funds into the local economy and freed up large
support to the banks, the large industrial groups
and the Trade Credit insurers (CAP and CAP +)
in order to smooth the impacts of the crisis
and help corporates to survive the credit
crunch. Some specialists mentioned that this
helped 15,000 to 30,000 corporates to escape
bankruptcy during this period. The room for
maneuver of the French government is much
more limited in 2012.
The Trade Credit insurance market is
currently in a similar state to where it was prior
to the 2008/2009 crisis. Insurance premium
rates are on the bottom of the cycle and the
ratio of cover offered to insured capital is very
high. After an accumulation of frustration from
customers and brokers during 2008/2009,
Trade Credit insurers were forced quickly to
regain and reinstate the confidence of their
clients and have been forced to grant very
aggressive conditions. With the Solvency II
regulations looming, the mono line Trade
Credit insurers face a new pressure on capital
allocation. Can the market escape from another
round of credit limits reductions and premium
rate increases?
Launched on 1st of January in Paris,
Equinox Global brings a new Trade Credit offer,
supported by Lloyd’s of London, to the French
market. This offer, being focused on providing
more certainty of cover and transparency,
will help French corporates to respond to their
major concerns of risk sharing, balance
sheet protection and maintaining necessary
operational funding from their banks.
Most of the experts
are predicting that
the number of
insolvencies in 2012
will be equivalent
to the 2009 peak.
The local brokers will find an alternative
Trade Credit insurance solution negotiated
with, and offered by, an insurer, fully aware
and understanding local issues, which will bring
satisfactory responses from their clients. In
addition, brokers will be able to have a direct
access to new insurance capacity and to be able,
where necessary, to initiate and to structure
co-insurance programmes.
Alban de Malherbe
Equinox Global Paris