Uptick in Business Spending Raises US Bank Hopes

Two-and-a-half years after the official end of the recession, businesses are starting to invest cash again, prompting bankers to hope they might start borrowing, too.

Consider Jim Burg. It has been a year since steelmakers started having trouble finding trucks to haul loads for the reviving auto industry. So Burg, whose company is based in Warren, Michigan, is finally about to borrow money from a bank to build his fleet of flatbed rigs to 85 from 70.

But Burg is taking the step carefully. He accumulated far more cash reserves than he has ever had in his previous 28 years in business. He also lined up bank credit lines in excess of what he needs to operate.

"We put in a very conservative business plan," said Burg. "Look what happened in the second quarter of last year when the tsunami hit Japan. That affected us directly."

Burg's story is a common one that bankers say gives them at least a little hope. They expect investments like those Burg is making will drive the economic recovery and bring additional borrowing and interest income —even as they recognize that in this day and age, businesses are mostly averse to debt.

"Companies are going to continue to increase productivity and generate cash," which they can use to build inventory, said Laura Whitley, commercial banking head at Bank of America Corp. [BAC  Loading...      ()   ] "I do not necessarily see them borrowing."

No borrowing surge

While banks large and small are certainly making more business loans, they say most of the money has been borrowed to replace worn-out equipment or to refinance existing debt. Businesses generally have not been borrowing to grow, making people like Burg a notable exception.

Bankers and analysts say they do not see a big surge of additional borrowing in the near term, following the strong growth of the last three months of 2011, when business loans outstanding at U.S. banks increased at an annual rate of 13.1 percent, according to Federal Reserve data.

A portion of that growth came from U.S. banks taking market share from retreating European banks and from the corporate bond markets, not from additional borrowing. Also, some of the surge came from companies hurrying to take advantage of an expiring tax investment incentive, said Christopher Mutascio, a stock analyst at Stifel Nicolaus & Co.

Initial data since December points to slower loan growth, said Mutascio. That would be a disappointment to investors who had recently been bidding up bank stocks in anticipation of another strong step up in business lending, he added.

Meanwhile, companies continue to take in cash profits from their operations that they can invest instead of borrowing. U.S. businesses piled up a record $1.6 trillion in bank deposits and money market funds through the end of September, according to Federal Reserve data. Bankers say companies continue to add to their deposits.

"Corporate America built and continues to hold an extraordinary amount of cash," said Terry Turner, chief executive of Pinnacle Financial Partners Inc, a Nashville, Tennessee-based bank that specializes in commercial and industrial loans. "That serves as a damper on loan demand."

In Huntersville, North Carolina, engineering giant ABB Ltd [ABB  Loading...      ()   ] of Switzerland is using its own cash this year to build a $100 million factory to make cables to transmit high voltage electricity, said Ismo Haka, the company's chief financial officer for North America.

ABB is keen on keeping debt low and cash high.

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Athens Told to Change Spending and Taxes

European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times.

The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a 130 billion euros second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil.

They range from the sweeping – overhauling judicial procedures, centralising health insurance, completing an accurate land registry – to the mundane – buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks.

“The program is much, much more ambitious than economic reform,” said Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy. “This is state building, as typically understood in traditional low-income contexts.”

Most urgency is attached to a 10-page list of “prior actions” that must be completed by Wednesday in order for euro zone finance ministers to give a final sign-off to the new bail-out at an emergency meeting scheduled for Thursday.

The 38 measures are a mix of laws that must be passed by parliament, ministerial decisions and presidential decrees that affect a complete cross-section of Greek economic activity, from health spending to municipal administration to tax collection.

Only a handful of the measures are listed as passed or in the process of being implemented, including a highly publicised 300 million euros in pension reductions and 325 million euros in other spending cuts. The other reforms are grouped under six categories, though most of the changes fall under spending cuts, bank regulations, and economic reforms.

Among the measures that must be completed in the next seven days are reducing state spending on pharmaceuticals by 1.1 billion euros; completing 75 full-scale audits and 225 value added tax audits of large taxpayers; and liberalising professions such as beauty salons, tour guides and diet centres.

Even the longer-term reforms must be completed quickly. A draft 49-page “memorandum of understanding on specific economic policy conditionality”, dated February 9, includes dozens of measures that must be completed in the first half of the year.

Many structural measures were agreed in 2010 as part of Greece’s first rescue package but were blocked by influential interest groups, trade unions and some senior finance ministry officials.

The opening up of closed professions – including pharmacists, lawyers, and truck and taxi-drivers – was due in September 2010, for example. While legislation liberalising 130 sectors was passed last year, back-up measures needed to implement the law were postponed indefinitely after a fierce backlash, including a three-week strike by taxi drivers at the height of the tourist season.

Similarly, a delay in reforms of healthcare procurement, which are opposed by doctors, medical suppliers and hospital managers, meant that savings of only 500 million euros were achieved in 2011 against a target of 1 billion euros, leaving the missing amount to be collected this year.

Mr Rahman said the scale and the speed of the reforms demanded raised questions about whether sceptical euro zone lenders were setting up Greece to fail sometime within the next year.

“Even if one understands the political imperative, the program is being set up to fail as many of the targets will be impossible to achieve,” he said.

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