October 25, 2012

Eurozone Private-Sector Lending Drops

Less appetite to borrow as lenders are reluctant

September saw lending to private companies in the eurozone fall substantially, as businesses reined in the urge to borrow and lenders remained reluctant to shell out.

Reuters reported Thursday that European Central Bank (ECB) data showed a decrease of 0.8% from a year ago in loans to the private sector, for both businesses and households, in the region. That was a bigger drop than expected by economists in a Reuters poll, who had forecast a median of 0.6%.

In the largest decrease since December, September business lending fell 20 billion euros ($26 billion) below August levels, with Italy among countries where lending slowed. Lending to businesses did continue to rise, however, in Germany, the eurozone's largest economy.

This is despite the fact that the ECB has flooded banks in the eurozone with over a trillion euros ($1.3 trillion) in long-term loans with extremely low interest rates in the hope of loosening credit for businesses and individuals. However, lenders took the money but not the bait and are hanging onto the funds they borrowed.

Eurozone E3 money supply followed tight credit, with the growth of money in circulation and deposited at banks slowing to an annual rate of 2.7% during September; that’s down from 2.8% in August. Analysts polled by Reuters had expected 3.0%.

Economist Howard Archer at Global Insight said in the report that the drop was not just because of increasing uncertainty about the economic outlook, but also because banks were not anxious to provide credit. He was quoted saying, "The concern is that a number of companies who do want to borrow—whether it be to support their operations, lift investment, explore new markets—and are in decent shape are finding it hard to."

He added, "So tight credit conditions are handicapping euro zone growth prospects.”

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