The industry is unable to borrow from the banks which are sandwiched between the need to meet the financial regulators' 9% Tier 1 capital ratio target by the end of June and the Spanish government mandate that the banks set aside additional reserves.
The result of these conflicting policies is that Tier I capital is reduced by the need to set aside additional reserves (which qualify as Tier II capital) and hence, to meet a higher Tier I capital ratio, banks are cutting back on lending.
The Spanish aerospace industry is the victim of this cut back in lending.
Regular readers will recall that this financial regulator induced credit crunch should not have occurred as, in the words of the OECD, 'bank capital is meaningless'.
A Spanish manufacturer of critical components for major aircraft makers including Airbus, Boeing Co. and Embraer is slowing production and struggling to pay its bills.
Alestis Aerospace SL is facing a cash crunch because of Spain's banking crisis, a powerful illustration of how Europe's financial upheaval is hurting its industrial economy and risks disrupting some of the world's most successful jetliner programs.
Seville-based Alestis earlier this month was placed under court administration, the Spanish equivalent of U.S. bankruptcy protection. Its troubles are spilling over to its suppliers, which are being paid late or not at all, and have drawn attention from Airbus. The unit of European Aeronautic Defence & Space Co. is Alestis's biggest customer and owns 1.85% of the company.
Alestis produces major parts of jetliners, including composite ribs, panels and skins for the hot-selling Airbus A320 and the A380 superjumbo, the world's largest passenger jet. Its long-term contracts bring steady payments from established companies.
But Spanish banks have slashed lending, so Alestis, like many skilled companies, is operating from one bill to the next.
"Five years ago the banks would come knocking on your door offering you loans," said Alestis board member Juan Pedro Vela in an interview. "Now you ask them for a loan and they shut the door in your face."
The problems loom even as Airbus and Boeing are producing planes near record numbers because airlines want fuel-efficient models. Both manufacturers have posted strong profits recently, but acknowledge that small suppliers may face more precarious financial situations....
Alestis was established in 2009 from the merger of several small aeronautic companies around Spain with support from the regional government of Andalusia. The goal, backed by Airbus, was to create a company with sufficient scale to act as a top-tier contractor. Although smaller than many other key suppliers to Airbus and Boeing, Alestis has valuable experience building parts from advanced composite materials.
It was just coming together when Spain's real-estate industry went bust. Banks were left with piles of bad loans that have drawn scrutiny from authorities and financial markets. Last week, the government ordered all banks in Spain to raise their provisions against potential losses tied to real estate, which will reduce their capital for lending to companies like Alestis.
Local savings banks, known as cajas, were the biggest lenders to Alestis, which employs roughly 1,700 people. But cajas are now considered Spain's weakest banks and the government has ordered them to merge to boost solvency. The risk now is a downward spiral if banks choke off their clients....Please re-read the highlighted text as it shows what happens when policymakers and financial regulators do not understand the role of bank book capital in a modern financial system.
In a modern financial system where deposits are guaranteed and banks have access to funds through a central bank, banks can continue to make loans and support the real economy regardless of the level of their book capital.
As a result, bank book capital is there to absorb the losses on the excesses in the financial system today and spare the real economy from damage. Subsequently, bank book capital levels can be rebuilt through retention of future earnings.
"The banks can't afford to have money tied up for 10 or 20 years, which is the nature of our business," he said. "It is impossible to explain that a company with a 20-year contract with Airbus can't get a loan. There is simply no liquidity."
Mr. Vela said the company's future is hard to predict. For now, managers are trying to adjust. "Before when you were developing a business plan, you could essentially skip the part about financing," he said. "Now that is all that we worry about."
No comments:
Post a Comment