Credit Crunching the Real Economy

Signs that the credit crunch is affecting the real economy in Europe continued to appear in the first quarter of 2008, as the real-estate and retail sectors and mergers and acquisitions all struggled with tighter lending criteria, inflation and dwindling investment.

There has been a tight sharpening in bank lending conditions and a widening of credit spreads, Juergen Michels, European economist at Citigroup, told CNBC.com.

Reluctance of the commercial banks to lend has hit the volume of home sales hard in many regions across Europe and pushed home prices lower in Ireland, the UK and likely Spain.    

UK house prices fell for the fifth-straight month in March, with the price of a typical house slipping 0.6 percent during the month, according to data from mortgage-lender Nationwide. House-price growth slowed to lowest level in twelve years, the UK mortgage lender also said.  

"A clear change in sentiment since the late summer has led to the sharp slowing in house-price growth,” Fionnuala Earley, chief economist at Nationwide said in a statement.

And in Ireland, house prices slumped by 8.8 percent on the year in February, compared to a 9.5 percent rise in the same period in the previous year, the independent think-tank Economic & Social Research Institute and Permanent TSB bank said.

Meanwhile data from Spain's National Statistics Institute showed a 15 percent fall in sales transactions for new homes in January, while transactions for existing homes fell 36 percent, suggesting dwindling demand is damaging closing prices.

Consumers Feeling the Pinch?

Shopping habits are also changing as disposable income shrinks because of rising inflation and higher energy bills, meaning shops selling cheap alternatives to core shopping items could benefit. 

“With a less affluent consumer you’re going to have to fight much harder to get your share of that smaller wallet, and prices are key,” Tim Green, retail analyst from Brewin Dolphin Securities, told CNBC. 

Europe's second-largest clothes retailer Hennes & Mauritz posted an almost 20-percent rise in first-quarter profit last week, as its range of relatively cheap apparel boosted February sales.

"People are getting more worried about the future and perhaps more worried about jobs," Simon Smith, chief economist from Weavering Capital, told "Power Lunch Europe."

Corporate Fund-Raising Slumps

Last year's flurry of large deals all but dried up in the first quarter of 2008, and two key mergers have even been called off. 

Brazilian miner Companhia Vale do Rio Doce canned plans to buy its Anglo-Swiss rival Xstrata in a deal that was reportedly worth up to $90 billion in cash and stock. And negotiations for a merger between miners BHP Billiton and Rio Tinto have all but fallen apart too. 

"The big high-profile deals aren’t happening right now because the big syndicated debt market is closed … there just isn't enough firepower in banks to go out and lend to these things," Robert Bidwell Bibow, partner at Atlantic Pacific Capital, told "Squawk Box Europe." 

The lack of available credit could also have serious implications for the private equity sector, Bob Parker, vice chairman from Credit Suisse Asset Management, told “Squawk Box Europe.” 

Also on the corporate front, European initial public offerings raised a little more than $800 million in the first quarter of 2008, which is sharply lower than the $13.8 billion raised in the same quarter of 2007, according to Thomson Financial. 

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