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Evolution of the economic situation: what effects on business to business credit?

Evolution of the economic situation, particularly in the Eurozone and the impact on trade credit following the conference on the Coface country risk January 21st.

Crise économique

Will 2014 be a key year in the evolution of the global economic crisis of 2007? For 7 years now, the crisis is there. One of its features is to have touched advanced countries unlike previous crises that had affected mainly emerging countries (Asian crisis, Argentina crisis), generating a feeling of invulnerability in developed countries and creating the illusion that the financial markets were efficient.

This was not the case, by far.

The complexity and obscurity of markets, their ever greater and immediate interconnection, excess leverage are factors which, with hindsight we now made ​​the financial crisis inevitable. The great human crises are always based on obvious causes ... once they occurred.

The crisis has significantly changed shape during this period and we can distinguish different phases outlined by Jean-Claude Trichet at the conference Coface Country Risk:

  • Crisis due to turbulences on the markets from 2007 to 15 August 2008 (date of the bankruptcy of Leman Brothers).
  • Liquidity crisis from August 15, 2008 to end of 2009.
  • Sovereign debt crisis from 2010 to 2013. For the first time in years, the solvency of some developed countries was questioned

Today it seems that a new phase starts with a resumption of significant growth in different regions of the world. Prospects are good in the U.S. (+2.4%) and in some emerging countries with contrasting situations (7.2% for China, 2% for Brazil).

The Euro area where the epicenter of the crisis moved in 2010 because of the fragility of some of its member states is slowly emerging from recession and has a respectable growth in 2014, although the performance is also varied. Germany expects growth of 1.7% in 2014 when the outlook for France is limited to 0.6%. UK surprised with a forecast of 2.1%, while Italy has stagnated at 0.4%.

If the return to growth is a good thing, it is not enough by far to see the end of the crisis.

  • First, it is too low in many countries to reverse the unemployment curve and to reduce business failures flirting with all time highs as for example in France with nearly 63,000 failures in 2013. Coface estimates that only 1.6% higher growth would reduce the number of insolvency proceedings in France.
  • Secondly the excessive indebtedness of states, fundamental cause of the crisis since 2010 has not decreased. Eurozone will long remain a potentially risky area given the differences between the states and a common monetary policy unable to reconcile the conflicting interests arising from this situation. Differentials competitiveness and lack of structural reforms contribute to the difficulties of a Eurozone still immature in its construction.

We are in a crisis in W (with rebounds) rather than U (a descent followed by a rise). It is therefore likely that the current episode is only momentary. The future (sustainable recovery or relapse) depends greatly on the ability of states to take advantage of this improvement and reform to reduce public spending. The experience accumulated over 30 years shows how this brave orientation is only too poorly implemented by governments too focused on the short term.

What are the consequences for trade credit in France?

0.6% of expected growth in 2014, France breathe a little but this level is insufficient to reduce unemployment and business failures. The cost of backup plans, judicial and other legal remedies liquidations stabilizes however amounted to € 7.3 billion in 2013. The concern following the increase in the average size of failing companies subsides gradually. If the number of procedures has increased by 5% in 2013, the cost grew by only 0.2%.

The number of failures should increase further in 2014 and may be beyond the "record" of 2009, but without causing the tsunami a moment considered (see the domino effect).

The crisis is durable, uncertainties regarding trading partners are strong. Implement its business principles of Credit Management is essential and strategic.

Govern is to foresee.

Running a business is to foresee the ability of its customers to pay their bills. It is also optimizing its internal processes with the ultimate goal of maximizing cash inflows, key to finance its activity and to develop its business.

In an uncertain environment sustainably, optimizing payment terms granted to customers, improving internal causing disputes and securing his business cases should be incorporated routinely in daily management.

From this point of view, the crisis is a source of improvements for businesses. Only those who are aware of these realities put all the chances on their side to protect their business and be able to seize the opportunities available to them.

Sources: Symposium on January 21 Coface country risk

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