ANNUAL REPORT 2008 - Polymer Bank Notes of the World

end of 2007. By December 2008 this cost was200 basis points above the level of the previousyear and 420 basis points above the historicallow reached in 2005. The level attained at theend of 2008 represents an all-time high since thestart of EMU and was well above that recordedin 2000. By contrast, as mentioned above, yieldson government bonds of comparable maturitydeclined. As a result, corporate bond spreadswidened significantly during the second half of2008. The increase in spreads also reflects thetightening of credit standards and higher creditrisk perceptions among investors.The real cost of quoted equity of non-financialcorporations increased markedly during the year.An evident deterioration took place in the secondhalf of 2008, when stock market prices (measuredfor instance by the Dow Jones EURO STOXX,a broad euro area index) plummeted and riskaversion reached exceptionally high levels. Aftershowing noteworthy resilience in the first halfof the year, earnings growth of listed enterprisesalso deteriorated sharply, turning negative byNovember on an annual basis.THE PACE OF EXTERNAL FINANCING BY NON-FINANCIAL CORPORATIONS MODERATEDNon-financial corporations’ external financingmoderated progressively in the course of 2008.In the fourth quarter of 2008 the real annualgrowth rate of financing of non-financialcorporations was 2.7%, down from 4.9% inthe fourth quarter of 2007 and 5.1% in thefirst quarter of 2008. This development wasmainly driven by the slowdown, albeit fromhigh levels, in the contribution of loans grantedby MFIs, and, to a lesser extent, by the declinein the issuance of quoted equity, while thecontribution of debt securities remained broadlystable (see Chart 19).According to aggregated firm-level data fromcorporate financial statements of listed firms,profits remained resilient during the first halfof 2008 (see Chart 20). However, measures ofcorporate profitability dropped considerably inthe second half of 2008. In parallel, earningsexpectations in the euro area were abruptlyChart 19 Breakdown of the real annualgrowth rate of external financing tonon-financial corporations 1)(annual percentage changes)6.05.04.03.02.01.00.0-1.0-2.0quoted sharesdebt securitiesMFI loans-1.0-2.02001 2002 2003 2004 2005 2006 2007 2008Source: ECB.1) The real annual growth rate is defined as the differencebetween the actual annual growth rate and the growth rate of theGDP deflator.revised downwards in the last quarter of 2008.The number of downward revisions to earningsexpectations for listed euro area firms reached anunprecedented peak around the end of the year.The rate of growth in MFI loans to non-financialcorporations slowed down in 2008. Followinga peak in nominal terms of 15.0% in March2008, this rate of growth moderated to 9.4%in December. This still robust year-on-yeargrowth rate somewhat conceals the underlyingweakening dynamics of the growth of MFIloans to the corporate sector, through a carryovereffect from strong growth in the first halfof 2008. Indeed, as shown by short-term growthrates, an acceleration in the slowdown took placetowards the end of the year, more markedlyin December, as a result of the deteriorationin financing conditions. The deceleration isbroadly in line with the tightening of financingconditions reported in the Eurosystem’s banklending surveys throughout the year, reducedmerger and acquisition (M&A) activities andthe moderation of economic activity. Theremight be a number of possible explanations6.05.04.03.02.01.00.0ECBAnnual Report200851