Credit crunch eases but business feels squeeze

Eurozone companies are feeling the pain from the global credit crunch, a major survey showed yesterday, just as money began to circulate more smoothly in financial markets with intensive central bank help.

The RBS/NTC survey of around 5,000 companies showed the abrupt end in August of a long-running credit boom knocked eurozone private sector growth to a two-year low this month as new orders plunged.

In further fallout from the crisis, which was triggered by defaults on US home loans, Europe's biggest bank HSBC Holdings Plc said yesterday it would close a US unit dealing in high-risk subprime mortgages, saying the business is no longer sustainable.

HSBC said it would cut 750 US jobs and and take an $880 million writedown on the Decision One Mortgage unit.

And Russia's UC RUSAL, the world's largest aluminium producer, said it had shelved a $9 billion plan to float shares in London this year due to the global liquidity squeeze.

An aggressive US interest rate cut on Tuesday has had some success in encouraging banks to start lending to each other again after subprime defaults raised a global scare over how widely this and other high-risk debt had been repackaged and sold on around the world.

But the US move has also weakened the dollar and propelled the euro currency to record highs above $1.40 - adding to the worries of eurozone exporters.

Airbus's chief operating officer said yesterday that if the euro carries on rising the European plane maker might have to find another €1 billion in savings under a restructuring plan drawn up with the currency at $1.35.

However, the Federal Reserve's half percentage-point rate cut, combined with the Bank of England's decision to join the Fed and the European Central Bank in pumping longer-term funds into money markets, has begun to break up the credit logjam.

The BoE yesterday gave details of the terms and timing of extra money market auctions that it promised earlier this week, after the government had to give customers of mortgage bank Northern Rock an unprecedented guarantee to stop a run on deposits.

Bankers and politicians have accused the British central bank of standing aloof for too long while the squeeze took hold.

"It's not going to help well-capitalised banks but it will help the Northern Rocks of this world," Jason Simpson, a strategist at ABN Amro, said of the auction plans.

Earlier yesterday the main London interbank rate for three-month sterling loans was fixed at 6.365 per cent, the lowest since August 14.

The overnight loan rate was fixed at 5.7525 per cent, just a touch above the Bank of England's 5.75 per cent benchmark rate. It had surged to around 6.5 per cent on Monday.

However, there were still signs of strain in euro interbank rates. The three-month rate fixed at 4.72375 per cent, representing a hefty premium over the European Central Bank's four per cent benchmark rate.

Highly liquid money and capital markets suddenly dried up in August when doubts about banks' exposure to tainted debt made them scared to lend to each other.

Yesterday's survey of eurozone companies showed the services sector took the hardest hit as the crisis made it harder and more expensive for companies and consumers to borrow.

The headline services index fell four points to 54.0 in September from 58.0 in August, the biggest tumble in the nine-year history of the index and the lowest level since August 2005. The Purchasing Managers' Index for manufacturing fell to 53.2 from 54.3 in August, its lowest point since November 2005.

Both indices remain well above the 50 mark that separates growth from contraction, but the sharp falls will reinforce the view that the European Central Bank will put off any further increase in its benchmark interest rate well into the future.

However, market measurements of the risk premium that investors require to hold European bank and insurance company debt fell by almost a third yesterday.

That underlined a turnaround in sentiment that was demonstrated on Thursday in renewed investor demand for high-quality European and US corporate debt issues.

At the higher end of the risk scale, First Data Corp had received $7 billion to $8 billion in orders as of Thursday for its $5 billion leveraged buyout loan, a banker close to the deal told Reuters.

The First Data deal - the largest of its kind to tap the US market since the squeeze began - is a crucial test of whether banks will be able to start placing a backlog of $300 billion of high-yield loans that are currently sitting on their balance sheets.