European banks are applying the brakes. Credit conditions are tightening. Next year the cost of borrowing money will rise considerably for consumers and businesses. According to our research department, the tightening of the money market is comparable to the levels we observed in the early stages of the COVID-19 crisis in 2020.

Expressed as a percentage, we expect corporate interest rates to rise by +200 basis points (BPS) on average in the first half of 2023 and by an additional +200 BPS in the second half. This means significantly higher costs for businesses, resulting in increased pressure on their margins, with a -3 pp drop in margin. Next year the rise in interest rates will be even higher for households than for businesses. As a result, purchasing power in the Eurozone will fall by an average of -1 pp.

Despite rising interest rates and a deteriorating economic outlook, European banks have so far remained flexible on credit. Total annual growth in loans to individuals amounted to +5.7% year-on-year in September. Corporate credit growth was +8.9% year-on-year. These are mainly shorter-term credits. Businesses need them because of the unexpected increase in the prices of energy and raw materials. Just over a year ago, borrowing was still practically "free". That era has definitely passed.
On the other hand, demand for long-term corporate credits has slowed markedly. The level of confidence of business owners and consumers has been seriously affected. Businesses are grappling with uncertainty stemming from the energy crisis, further looming disruptions to supply chains and poor economic prospects. The drop in consumer confidence and the weakening of the housing market are affecting household demand for credit.

Johan Geeroms, our Director of Risk Underwriting Benelux, explains. "Banks know better than anyone that the government's continued support measures in recent years have seriously skewed the situation for businesses. Bankruptcies have not risen too sharply so far, but many people share our fear that the blow will actually fall. The reluctance of the banks is therefore very understandable."

According to Johan Geeroms, the tightening of lending criteria affects SMEs primarily. "SME entrepreneurs already have so much on their minds. Everything is happening at once. Problems with raw material supply, labour and energy shortages and, on top of all that, higher financing costs and interest rates. Average turnover growth for SMEs has fallen throughout the year and even more sharply in recent months."

Also according to Johan Geeroms, the situation is slightly different for big businesses. "They are significantly less susceptible to tighter financing conditions, as they have often already covered the refinancing of outstanding loans up to the end of the following year. There are also considerable cash reserves in large corporations. This helps to prevent acute liquidity stress. But of course, all this will change if the recession worsens and lasts longer than currently expected."

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