For europe, the credit crunch is here

Dominick Boudier, who runs a printing business exterior Paris, received a missive from a key provider a week ago that her recognition line was being cut in half, effective immediately. When Boudier picked up the phone to find out why, she was told that the provider's recognition insurance company had ordered the clampdown.

On mon, Boudier's main provider followed suit, efficaciously paralyzing her concern.

"We can't do our job and it has nil to do with order books," Boudier said. "Clients pay on norm with a 60-day delay. We just haven't got the cash-flow to pay our provider instantly."

Boudier has pleaded with her bank to make up for the sudden shortfall, to no avail. "We can survive this for a week, or a few weeks," she said, "but beyond that, nil is certain."

The recognition crunch that had been mostly a U.S. Phenomenon has arrived with gale force in Europe, transforming the economic outlook across the Atlantic Ocean in just the past few weeks.

While many person businesses still maintain solid relations with their lenders, a new level of chaos in recognition markets is crimping financing for numerous borrowers across Europe. So far, global interest rate cuts and cash extract by telephone exchange banks have provided scant alleviation.

"It's about impossible to invest for the hereafter in this environment," said Seth Thomas Serval, chief executive director of Baracoda, a company based exterior Paris with 40 employees that develops Bluetooth devices. "I'm not sure how long it will last."

Europe as a whole may not be agony from the lodging market desolation of the United States, but the down spiral of financial events since the bankruptcy filing of Lehman Brothers on Sept. 15 has eviscerated European concern and consumer confidence. (Page 12)

Worries about the future are curbing household spending, countering any relief Europeans got from the sharp fall in oil prices from their July peak of $147.27 a barrel.

Business investment, which drives purchases of the high-value goods and services that are a European specialty, is ebbing fast amid the insecurity.

As a result, most economists and many business leaders now predict that a European recession is nearly certain this year, and may well continue into 2009.

"Predictability disappeared once the financial crisis accelerated dramatically during the last two weeks of September," said Henning Kagermann, co-chief executive of SAP, the bellwether German software giant.

SAP had to deliver the bad news Monday that its earnings for the third quarter would fall short of expectations. The reason was simple: Customers who were prepared to spend on information technology despite the slowdown this year suddenly lost their appetite for SAP products.

The International Monetary Fund now expects growth in the 15-nation euro area to fall during the second half of this year and barely to rise in 2009. And that estimate, prepared in advance of the meetings this weekend of the IMF and World Bank in Washington, is already considered out of date by many experts. For Britain, the only major European economy outside the euro zone, the prospect is a slightly shrinking economy through next year, the IMF said.

In the United States, lending began to contract as early as autumn 2007, when the market for short-term corporate securities, known as commercial paper, stalled. Collateral for much of this paper was the now-notorious mortgage-backed securities, and standing corporate credit lines could not compensate.

In Europe, reliance on traditional bank lending helped insulate the economy. But the retreat of money market funds from the wholesale market in the days after Lehman's bankruptcy filing produced a credit squeeze that pushed Europe over the tipping point, economists say.

Instead of lending their spare cash to each other or the rest of the economy, as they have been accustomed to do, banks have parked it with the European Central Bank at ultralow interest rates. Liquidity provided by the central bank, in short, is going through a revolving door.

The ECB took on a record €102.8 billion, or $137.7 billion, on Sept. 30, and €64.4 billion on Thursday - all in a deposit facility that was barely used before the crisis.

"No sane banker with good contacts and clients would do this," said Erik Nielsen, chief European economist at the Goldman Sachs office in London. "It would be a huge arbitrage profit if they wanted to lend, but they don't."

The European auto industry, heavily dependent on consumer sentiment, is already retrenching.

Volvo said it would eliminate 2,700 jobs in Sweden and an additional 600 abroad in response to what it called the "rapidly deteriorating market situation." Opel, the German subsidiary of General Motors, temporarily shut down two plants to accommodating the steep falloff in demand.