ECB under pressure to unblock lending in eurozone

26th April 2013, Comments 0 comments

New data released on Friday suggesting that euro area credit markets remain highly dysfunctional turned up the heat on the European Central Bank to act, analysts said.

The ECB published two sets of data showing that lending activity in the 17 countries that share the euro remains at very low levels, not only because of weak demand, but also because firms are finding it difficult to obtain financing.

A survey of the region's small and medium-sized businesses (SMEs) -- which form the backbone of the eurozone economy -- found that getting bank loans remains difficult.

And money supply data showed that eurozone bank loans to the private sector declined by 0.8 percent in March compared with the same month in 2012 after already shrinking by the same amount in February.

In the SME survey, while the 7,510 companies polled reported an increase in external financing needs between October and March, "they also reported a deterioration in the availability of bank loans," the ECB said.

The central bank conducts the survey at six-month intervals and the results are closely watched amid complaints that the unprecedented liquidity that the ECB made available to banks last year to avert a credit crunch is still not finding its way into the real economy.

Nevertheless, the data did appear to offer tiny glimmers of hope, the ECB noted.

According to the SME survey, "the situation has improved compared with the previous survey."

The survey results "also point to lower rejection rates for euro area SMEs when applying for a loan and a somewhat smaller percentage of SMEs reporting access to finance as their main problem," it said.

Earlier this week, in the ECB's closely watched quarterly Bank Lending Survey, the central bank found that credit conditions in the euro area are continuing to tighten, but at a slower rate.

That survey, which quizzed a sample of 135 banks in the euro area, found that the proportion of banks expecting to tighten their loan criteria for businesses and households is declining.

The ECB has long argued that the weak level of credit in the single currency area mainly reflects weak demand for credit rather than tight lending conditions.

But analysts believe the situation is more complex and suggested the ECB will have to come up with measures to get lending activity up and running again.

Howard Archer at IHS Global Insight blamed the situation on "an ongoing combination of limited supply and muted demand."

Banks believed the economic situation and outlook in most eurozone countries provide a risky backdrop in which to lend, Archer said.

At the same time, with eurozone economic activity still generally weak and business confidence pretty low and fragile, demand for credit was muted.

The poor lending data "ramps up pressure on the ECB to come up with measures aimed at improving credit availability to companies, especially small and medium-sized ones," the expert said.

And with money supply growth slowing in March, adding to evidence that eurozone inflationary pressures are low and receding, "this gives the ECB ample scope to cut interest rates from 0.75 percent to 0.50 percent" at its next policy meeting on May 2, Archer argued.

ECB chief Mario Draghi has said that a possible rate cut was already discussed at the central bank's last meeting earlier this month.

But "ongoing disappointing eurozone economic news and further evidence of muted inflation could very well prompt a move as soon as its May meeting," Archer concluded.

Marie Diron at Ernst & Young Eurozone Forecast agreed.

"Today's data showing ongoing falls in credit in the eurozone provide a further argument in favour of some monetary easing to be announced at next week's ECB meeting," she said.

A rate cut on its own would not solve all the eurozone problems, the expert argued.

"But it is needed to avoid deeper and longer recessions in particular in peripheral countries," Diron concluded.

© 2013 AFP

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