Europe’s Banking Sector Woes Will Make It Tough For Aussie SMEs

The European banking sector is still a long way from economic recovery, and this is going to have a major impact on Australian SMEs.

This blog will highlight how owners and managers can prepare their businesses for the tough times ahead.

Recent commentary surrounding Europe’s economic stability has focused heavily on the Committee of European Banking Supervisors’ (CEBS) ‘stress tests’.

Test results were released in late July 2010 and the above 90% pass rate achieved by Europe’s banks gave some people a sense of security. But should it?

Attention should be turning to Europe’s next, and arguably much larger, challenge: refinancing the $2.7 trillion bank borrowings which fall due during the next two years.

This graph, released by the International Monetary Fund, clearly illustrates the gravity of the European banks’ short to medium term debt position when compared to the rest of the world:

One of the objectives of the CEBS stress tests was to encourage investors to buy back into the banking sector by easing concern as to the health of European banks following the GFC.

This hasn’t occurred.  The European bank funding market response has been inadequate, so European banks will need to look to global funding markets to satisfy their refinancing needs, resulting in significant ramifications for Australian businesses.

Why? Because the vast majority of Australian SMEs borrow from Australian banks.  Australian banks borrow approximately 40% of the funds they lend to SMEs from offshore banks.

With the European banking sector likely to soak up a significant portion of funds available on the international banking market, there will be less available for Australian banks to borrow.

The impact on SMEs is clear: Australian banks will have less money to lend and the money which is available will cost significantly more. The Australian banking sector has indicated that funding for SMEs is only going to become more difficult before it improves.

What SMEs should do to strengthen their case

With lenders likely to channel their funds towards those businesses which can demonstrate a lower risk profile than their peers, business owners and managers will need to think strategically about how they can best market their business to potential financiers.

We suggest business owners and managers consider:

  • Working capital optimisation
  • Updating business plans
  • Reviewing 3-way financial forecasts
  • Reviewing rolling cash flow forecasts
  • Strengthening financier relationships

I’ll be talking more about preparing your business or your clients’ businesses for a debt raising or debt restructure in upcoming posts. In the meantime, I’m happy to answer any questions you may have on this topic.

Elizabeth Mawby was a fomer Client Director at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.


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