Andrew McErlain is an investor dealing with funding issues in medium enterprises at the coalface. M Institute asked Andrew to comment on the market conditions he is witnessing. Andrew was managing director of outsourcing at KCS Software before its acquisition by Sage in 2007. Here is Andrew's report.
At present there seems to be a considerable gap between the reassuring statements from Government about the freeing up of lending channels and reality at the coalface. It is very difficult to get medium sized acquisition deals funded in the current climate as the banks have little or no appetite for new business.
Judging by recent press commentary about the balance sheet frailty of our leading banks, I wonder if the real exposure to loss here is significantly higher in the banks than has been recognised within official channels. Is it perhaps the case, that because of the underlying complexity of many of the leading banks’ derivative exposures, they still do not know the full measure of their liabilities? This would perhaps explain the constant flow of further bad news from the banks and the increasing realisation that the first round of government funding has proved inadequate.
Whatever the underlying reasons, this combination of the lack of funding available in the market and the constant dribble of further ‘news’ regarding balance sheet frailty amongst the banks is perhaps the most corrosive combination in terms of any return towards market confidence. We all saw the impact on the Japanese economy in the nineties after their asset bubble burst but many commentators believe that the subsequent long period of deflation in Japan was exacerbated by the lack of recognition within the leading Japanese banks of the full extent of their losses. From what we have seen over recent months, the same thing seems to be happening here in the UK.
I would therefore encourage the authorities to get to the core of this issue as quickly as possible. Given that the majority of our major banks are now dependent on taxpayer funding, it seems reasonable to request a full and accurate picture of their consolidated liabilities. Without that and a subsequent funding agreement that is based on hard reality, I think there is a significant risk that we will get locked in this cycle of Government reassurance that the latest initiative will work only to find that it never stood a chance because of the progressive ‘discovery’ of even greater bank frailty.
Comments