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Fear of contagion from the credit crunch is spooking finance chiefs around the world.
Jason Karaian, CFO Europe Magazine
October 1, 2007
For weeks, debate has raged over whether the credit crunch gripping banks, hedge funds and private equity firms will spread to the global economy. In a recent research note, State Street's Andrew Capon made his opinion clear: "Those that believe this will have no impact on the real economy are whistling in the dark."
CFOs are also worried about the broader implications of recent turmoil in the credit markets, according to our latest global survey of more than 1,300 senior finance executives conducted in conjunction with RSM Erasmus University in the Netherlands and Duke University in the US. In Europe, only 26% of CFOs say that they are more optimistic about the regional economy than during the previous quarter, a sharp decline from 41% last quarter and one of the largest quarter-on-quarter drops in the survey's history. Economic confidence is now at a two-year low, having set a two-year high only six months ago.
Encouragingly, CFOs are more upbeat about the prospects for their own companies, with 46% more optimistic about the year ahead, up from 44% in the previous quarter. In fact, finance chiefs upgraded their earnings projections in the latest poll, forecasting a rise of 11% for the coming year, compared with 9% three months ago.
However, should the doomsday scenario of widespread credit-crunch contagion come to pass, it seems inevitable that the confidence CFOs have in their companies will succumb to their gloomy macroeconomic expectations. More than 40% of finance chiefs in Europe say they are already feeling the effects of the credit turmoil. In the US, where the credit troubles began with teetering subprime mortgages, CFOs say that the average cost of servicing debt has risen by 72 basis points in the past three months.
American CFOs' confidence took the biggest knock of all the regions in the latest survey. Economic optimism across the Atlantic plunged to a six-year low and CFOs are clamouring for further, aggressive action on interest rates by the Federal Reserve. Conditions in Asia are sunnier, despite finance chiefs there expressing a high level of concern about the cost and availability of credit.
Around the world, CFOs are reacting in the same way to the looming threat of a credit-driven economic downturn. Finance chiefs feeling the pinch of tighter credit conditions say that they will delay capital spending, M&A and hiring, in that order, for the foreseeable future. Until clarity on the extent of the credit contagion emerges, the environment will remain, in the words of Bobby Rakhit from financial data provider FactSet Europe, "dark, mysterious and a bit scary."
Jason Karaian is a senior editor at CFO Europe.