"...as long as the music is playing, you've got to get up and dance. We're still dancing." /Financial Times in July 2007: Charles Prince, Citigroup (former) chief executive/

1. The Financial Crisis of 2008
"...as long as the music is playing, you've got to get up and dance. We're still dancing."
/Financial Times in July 2007: Charles Prince, Citigroup (former) chief executive/
Author: Attila Németh
14.05.2013.

2. Index
Introduction …………………………………………………………………………………………………………………………………………………… 1.
The impacts of the crisis on the small and medium enterprises ………………………………………………………………………. 1.
Financing
………………………………………………………………………………………………………………………………………………………… 3.
Payment discipline …………………………………………………………………………………………………………………………………………. 5.
The impact of the state …………………………………………………………………………………………………………………………………… 7.
Success factors of enterprises in the crisis ………………………………………………………………………………………………………. 8.
Conclusion ……………………………………………………………………………………………………………………………………………………… 9.
Bibliography …………………………………………………………………………………………………………………………………………………… 10.

3. Introduction
The manifestation of financial crises may be different, but the essential features are the same. Therefore it is not by
chance that many tend to find similarities between the Great Depression of 1929-33, the Stock Market Crash of 1987,
the Financial Crisis of 1998 (the collapse of LTCM), the Japanese Crisis of the 1990s, the Swedish Crisis of 1991, the
Asian Crisis of 1997 and the crisis of 2008. The question is not whether there are or there will be abuses, but rather
the rate of variation. Some think that, due to the accelerated flow of information and interlocks, globalized markets
will result in the rapid spread of crises and their destructive effects will probably be greater.
The impacts of the crisis on the small and medium enterprises
Small and medium enterprises (hereinafter referred to as SMEs) play a crucial role in employment, making income and
they are the engines of innovation and development. They account for the half of employment in the OECD countries,
99% of the companies belong to the SME sector and 92% of them are microenterprises. Therefore, the typical
European company is a microenterprise. 84% of jobs were made by SMEs in the EU between 2002 and 2007. This rate
is higher than their role in employment (67%), however, productivity is lower in these jobs. It is proven by the fact that
SMEs produced 52% of the added value, which is lower than their rate of employment. (Source: Audretsch et al.
[2009] p13)
Table 1: Sectoral rate of enterprises in EU-27 in 2007
Sector
Number of enterprises
average number
of employees
per enterprise
small and
medium
enterprises
big
enterprises
total
mining 22,000 300 22,300 37
processing industry 2,357,000 19,000 2,376,000 15
electricity, gas and water supply 29,000 1100 30,100 56
building industry 2,914,000 2500 2,916,500 5
trade, reparation 6,491,000 6600 6,497,600 5
accommodation, service, catering 1,729,000 1300 1,730,300 5
transpont, storage, telecommunication 1,243,000 3500 1,246,500 10
real estate, economic services 5,625,000 8500 5,633,500 5
total 20,409,000 43,000 20,452,000 6
Source: Audretsch et al.[2009] p13
The rate of SMEs, as opposed to big enterprises, is the highest in catering and the building industry, the lowest in
mining and public utility services. The rate of SMEs is the highest in the services sector: trade and reparation (32%), as
opposed to big enterprises, where most of them deal with industrial production (44%). (Source: Audretsch et al.
[2009] 23. p30)
Turbulences set off from the interbank markets and spread during the crisis that started in the summer of 2007. The
1.

4. confidential crisis and the expensive bank sources force the banks to center on the more reliable clients and cut
credits (credit crunch), which may highly affect SMEs. Therefore, SMEs highly depend on the impacts of the crisis, but
are more sensitive from other aspects.
Main reasons as defined by OECD:
• they cannot decrease their activities, they are already small enterprises,
• they cannot diversify their activities, since they are usually too small for that,
• they cannot obtain outer sources from the capital markets, so they need loans (while their credit rating is
low, if they have any),
• they have fewer financing options.
There exists another aspect in the literature (for example Narjoko and Hill [2007]): SMEs can respond more flexibly to
environmental changes (provided their structure is less bureaucratic and hierarchic, they can develop and introduce
new products much faster), so they have a better chance of survival in crises. According to this aspect, a crisis can
generate innovation and may force enterprises to develop new products and discover new markets.
Therefore, the crisis affects SMEs better, but it gives a better chance to innovative enterprises to grow faster and get
new markets.
A GALLUP research on the financing situation of SMEs [2009] showed that 48% of enterprises on the territory of EU-27
had reported a fall in income and 51% a fall in profits (because 36% of them had a rise in labor costs and 49% claimed
to have higher raw material and energy costs). The most affected enterprises are located in Lithuania (80% of the
enterprises had lower revenues) and Ireland (78%), while two thirds of the enterprises suffered drops in revenues in
Bulgaria, Latvia, Spain and Estonia (between 66 and 71 %). The biggest losses were generally made by medium
enterprises. 29% of the enterprises reported a fall in the number of clients. Cosh et al. [2009] received similar replies
when they asked British enterprises what makes them fail most to reach their business objectives. 39% of the
respondents found that the loss of clients is the most serious factor in failing to reach their business objectives (Table
4), as opposed to the 17-19% who considered the greatest limitation to be the financial opportunity or cost. The
difference is even more obtrusive if we compare these results with the results of a research made with the same
enterprises in 2004, since in the "normal" period almost the same number of enterprises considered financing the
greatest restrain as during the crisis.
Table 4: What makes British enterprises fail to reach their business objectives? Source: Cosh et al. [2009] p7
Table 4: What makes British enterprises fail to reach their business objectives?
Availability or cost of resources of growth 2004 2008
barely restrains 50 42
little restrains 31 39
considerably restrains 19 19
Availability or cost of bank account credits
barely restrains 61 46
little restrains 25 36
considerably restrains 14 17
The pace of market demand growth
barely restrains 37 19
little restrains 37 42
considerably restrains 26 39
Cosh et al. [2009] p7
All in all, it seems that the decreasing demand is a key phenomenon of the crisis, making the biggest problem for most
SMEs.
2.

5. Financing
There are several examples for the interdependency of output, the cash quantity and cyclic movements of credit
financing in the professional literature.
Bordo and Haubrich [2009] argue that, having examined the crises in the USA since 1873, although financial crises
always result in the fall in output, they will be more serious and longer if loans are less available.
OECD [2009] collected why banks provide more limited loans following the crisis starting in 2007:
• SMEs have bad prospects since they are more sensitive to the crisis (they are forced into quality),
• it is more difficult for the banks themselves to gain sources (the panic in the interbank markets results in
higher capital costs),
• and at the same time, most of the banks try to improve their balance. As a result, loans are only given to the
most reliable clients, meaning that "normal" practices of credit provision return.
Table 6 shows the result of bank loan claims in Q1 of 2009 in the eurozone. A relatively little proportion of enterprises
did not claim any loan at all to avoid refusal. Most of the enterprises received the whole amount requested. It is clear
from the figures that it is micro-enterprises that do not favor loans and they have the most refusals.
Table 6: Requests for bank loans and the results in the eurozone (Q1 of 2009) Source: ECB[2009]
ECB[2009]
As it can be seen from the table (Table 7) compiled by ECB [2009] the stricter conditions of financing have
considerable impact on, i.e. raise the non-interest fees and deposits and decrease the credit limits and the length of
the loans. Clearly, these stricter measures do not necessarily have a greater impact on SMEs, since a relatively greater
proportion of big enterprises experienced a rise in interests and non-interest fees than SMEs. The credit limits are
higher for big enterprises and they are not so much affected by higher deposits. It is worth focusing on the fact within
SMEs, micro-enterprises were mostly affected by the changes.
Table 6: Requests for bank loans and the results in the eurozone (Q1 of 2009)
requested
did not request
fearing refusal
did not request
due to the lack
of own sources
did not
request for
other
reasons
do not
know/no
reply
number of
enterprises
big
enterprises
33.70% 1.20% 37.80% 24.70% 2.70% 1,876
SMEs 28.10% 5.10% 37.50% 28.00% 1.40% 4.215
out of
which:
micro 25.20% 6.70% 35.70% 31.20% 1.30% 1,965
small 29.30% 4.00% 38.10% 26.80% 1.70% 1,269
medium 32.30% 3.10% 40.30% 23.00% 1.30% 981
total 29.80% 3.90% 37.60% 27.00% 1.80% 6091
request
wholly
accepted
request partly
accepted
requested, then
cancelled
request due to
the costs
requested,
but refused
do not
know/no
reply
number of
enterprises
big
enterprises
72.30% 13.10% 0.00% 5.20% 6.40% 631
SMEs 60.40% 16.90% 4.20% 12.00% 6.50% 1,185
out of
which:
micro 53.40% 16.70% 5.70% 17.70% 6.40% 496
small 62.00% 17.30% 4.50% 8.80% 7.40% 372
medium 69.30% 16.80% 1.40% 6.90% 5.60% 317
total 64.50% 16.60% 2.70% 9.60% 6.50% 1,816
3.

6. Talking of other financing options, OECD [2009b] mentions that investing capital does not primarily work under these
conditions, since the funds can hardly invest sources and cannot follow the usual exit strategies (stock sales etc.) and it
is difficult to find suitable projects.
Payment discipline
4.

7. Another problem is that SMEs have a worse payment discipline, forcing them into an even worse situation, since apart
from the fall of demand (cumulation of stocks) it most decreases their functioning capital, making liquidity problems.
This fact can make functioning enterprises insolvent (OECD[2009b]).
According to the figures shown by Ferri and Kang [1999], as part of the Asian crisis, the number of bankruptcies, delays
and refusals reached historical heights alike.
Table 10: percentage of accounts delayed and refused
A similar process takes place during the crisis of 2008, see figures of OECD[2009b], where 43 of Belgian enterprises
reported payment delays (14% responded by delaying their own payments), while in the Netherlands 50% of
enterprises reported that delayed payments posed a problem for them. 38% of the enterprises in Britain (Cosh et al.
[2009]) found that they had to spend more time and/or money on checking the customers' credit standing.
Most enterprises lacking payment discipline are small businesses; while the authors find it possible that the delayed
payment practices of bigger enterprises may force business partners to behave similarly. Looking at each sector,
enterprises in the building industry are more likely to be less disciplined than other sectors in the processing industry.
Summarizing the changes of the environment, the fall of demand is considerable, having the greatest impact on SMEs.
Besides, in most countries, the serious problems are posed by worsening payment disciplines, active capital problems
and limited outside financing opportunities. The problems of each country are summarized in table 11.
Table 11: Crisis experience and its expected impact of the crisis on SMEs in OECD countries
5.

8. More European enterprises invested from loans.
Table 12: What was the loan spent on (in the previous 2 years) (percentage of enterprises that mentioned)? Source:
ECB[2009]
The number of bankruptcies is highest in the industrial sector (38%), followed by the trade sector (30.4%), services
(16.6%) and building industry (14.9%). (Gregory et al.[2002])
As Table 14 shows, there was a considerable fall in the processing industry of the EU than the building industry.
However, the proportion of SMEs are higher in the building industry than in the processing industry, which can be the
result of the fact that SMEs are more badly hit by a smaller fall. Source: Eurostat
6.

9. The impact of the state
In addition to demand activation (consumption packages, infrastructure development, tax policy) and intervention in
the labor market (cut employment taxes and social security contributions), the ways of supporting measures to
finance SMEs (OECD [2009b]) are the following:
• at the time of recapitalization of the banks, funding the SMEs is required as a condition, or state guarantees
are provided in other ways to the credits granted to SMEs (no good practices);
• sale is supported by export credits and insurances, factoring options, etc.;
• payment discipline of the state is improved. It may be the form of immediate or monthly VAT refund (in the
Czech Republic, France, Spain) and quicker payment of state orders (30-day term suggested by the European
Commission, 10-day term tackled by the United Kingdom);
• longer term credits enhancing investments, accelerated possibilities of depreciation;
• perks encouraging employment making employees enable to receive full salaries even for part time workers;
• tax cuts, which may include corporation tax or temporary VAT cut as (the United Kingdom).
Table 16 shows the measures taken in different countries. Source: OECD [2009b] p38
OECD [2009b] p38
a. Monitoring means increased control (occasionally on a monthly basis) by the state on the credit activity of the banks recapitalized by the state. In
case of mediation a state body tends to encourage the agreement between the enterprises (mostly SMEs) and aided banks,
However, OECD is worried about the reduced credit placement to banks that were recapitalized with this condition,
Table 16: Steps made by governments and international organizations to relieve the impacts of the crisis on SMEs
measures supporting sales, cash flow and working
capital
advancing SMEs to get liquidity
encouraging
investment-
friendly
measures
confirmation
of the capital
position
ease of
working
capital
shortage
mitigation
and cut of
tax
payments
export
mitigation
mitigation and
acceleration of
state
payments
establishment of
credit and
guarantee
options
mediation
and
monitoring
(a)
OECD countries
Australia   轟 
Austria   mediation
Belgium   
the Czech Republic   
Denmark    
the USA  monitoring 
the UK   
Finland  
France     mediation 
Greece 
the Netherlands     
Japan  
Canada    
Korea 
Luxembourg  
Hungary   
Mexico    
Germany   
Italy     monitoring 
Spain   
Switzerland  
New Zealand   
EC  
non OECD countries
Brazil   
Chile    
Estonia 
Russia 
Romania 
Slovenia   
Thailand 
international organizations
EIB   
7.

10. therefore an increased monitoring activity is advised. Turin Round Table organized by OECD (OECD[2009a]) preferably
advised the reduction of not profit sensitive taxes as SMEs more badly affected by them.
Success factors of enterprises in the crisis
Based on enterprises in Indonesia, Narjoko and Hill [2007] studied the factors determining the success and survival of
an enterprise during the Asian crisis. Their results showed that the performance is improved mainly by foreign
ownership and the export experience during the crisis, but it is worse if the size of the enterprises is bigger. On the
other hand, bigger enterprises performed better during the time of recovery. However, bigger enterprises had better
chances of survival during the crisis as well as the time of recovery.
Note that the research made by GALLUP [2009] shows that the revenue was more likely to increase in case of
innovative enterprises than non-innovative ones (17% vs. 25%). This fact seems to support the idea that the crisis may
give opportunities for certain enterprises, which is also confirmed by the growth over 20% that innovative enterprises
expect in 2 years after the crisis (table 18). Cosh et al.[2009] found similar differences: 66% of British innovative
enterprises expected the growth of revenue contrary to the 43% of non-innovative ones.
Table 18: Annual growth of revenue in 2009 for 2 years in advance
8.

11. Conclusion
The related literature makes it clear that the most influential impact is the fall in demand, which deteriorates the
efficiency of SMEs. What makes the situation more serious is that payment terms are longer and payments are
delayed, which is the second most serious impact. Therefore, enterprises have to make greater efforts to select
solvent and secure partners. Active capital problems can be fatal if outside sources are limited, seriously affecting
SMEs that spend most of their loans on active capital financing. Governmental measures are mostly concentrated on
improving financing: the most frequent steps to support SMEs are providing credit opportunities and guarantees (or
extending the existing ones). Besides, they are often backed by export supports and lower taxes. It is inspiring that
the sector is able to recover from a 30% drop very soon, based on the example of the Asian crisis.
Based on recent experiences, innovative SMEs have a better chance to create new markets following a crisis.
9.

12. Bibliography
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on EU Small and Medium Sized Enterprises. EIM Business & Policy Research, Zoetermeer (January 2009).
BORDO, MICHAEL D. – HAUBRICH, JOSEPH G. [2009]: Credit Crises, Money, and Contraction: A Historical View. Federal
Reserve Bank of Cleveland, Working Paper, No. 09-08. (September 2009)
COFACE [2010]: Business Climate Analysis, Hungary. Risk Assessment.
download:http://www.coface.hu/CofacePortal/HU/hu_HU/pages/home/risks_home/business_climate/climate_file//
Hungary?nodeUid=572140
COSH, ANDY – HUGHES, ALAN – BULLOCK, MILLER – MILNER, ISOBEL [2009]: SME finance and innovation in the
current economic crises. University of Cambridge, Centre for Business Research, Cambridge, Great Britain.
download: http://www.cbr.cam.ac.uk/pdf/CrCr_EconCrisis.pdf
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FERRI, GIOVANNI – KANG, TAO SOO [1999]: The Credit Channel at Work Lessons from the Republic of Korea's Financial
Crises. World Bank, Policy Research Working Paper No. 2190. (September 1999).
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for Enterprises and Industry of European Commission and European Central Bank (September 2009)
download: http://ec.europa.eu/enterprise/newsroom/cf/itemlongdetail.cfm?lang=hu&item_id=3611
NARJOKO, DIONISIUS – HILL, HAL [2007]: Winners and Losers during Deep Economic Crises: Firm-level Evidence form
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Policy Responses. Organization of Economic Cooperation and Development (February 2009)
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