FRANKFURT: Lending to businesses in the debt-mired eurozone contracted sharply again in August, data showed on Thursday, turning up pressure on the European Central Bank (ECB) to act to correct the trend.
ECB data showed that private sector loans dropped by 2 percent in August in a year-on-year comparison, after contracting by 1.9 percent in July.
The trend is all the more worrying, because it could potentially sour the nascent economic recovery in the 17 countries that share the euro, analysts said.
And it turns up the heat on the ECB, which has recently suggested it may consider pumping more money into the system via special long-term refinancing operations, or LTROs.
“The eurozone’s recovery remains a credit-less one,” said Berenberg Bank economist Christian Schulz.
But “there are some signs of improvement,” he added.
Credit weakness was continuing to affect the crisis countries most. “But growth was improving in many countries,” notably Spain, Italy, Greece and Portugal, Schulz added.
“Had it not been for a sharp fall in Germany, credit growth might have improved overall,” he further said.
The ECB has flooded eurozone banks with more than 1 trillion euros ($1.35 trillion) in cash at the end of 2011 and the beginning of 2012, in a bid to avert a potentially disastrous credit crunch.
ECB chief Mario Draghi told a hearing at the European Parliament in Brussels on Monday that another LTRO could be on the cards.
The ECB was “ready to use any instrument including another LTRO if needed to maintain the short term money markets at the level that is warranted by our assessment of inflation in the medium term,” Draghi said.
Marie Diron at EY Economic Forecast said that such a move “could indeed be needed for parts of the banking sector, if not for the eurozone as a whole.”
She argued that loans to businesses were falling “partly because companies are trying to reduce debt but also because banks are not able to lend.”
“It seems that some banks at least are preparing for the ECB’s asset quality review by restructuring their balance sheets,” Diron said.
“Although positive in the medium term, since this should deliver a fitter banking sector, it could be negative for growth in the short term if lack of credit availability prevents business to invest as they would need to,” she said.
Howard Archer at IHS Global Insight attributed the ongoing weakness in credit to the fact that eurozone economic activity was “still limited and business confidence hardly buoyant despite recent improvement.”
However, with the eurozone seemingly headed for further modest growth in the third quarter—after finally exiting recession in the second quarter—and business confidence improving gradually but steadily, “it is possible that demand for credit from businesses in particular could start to pick up over the coming months,” he said.
The ECB also published its latest money supply figures, a preliminary indicator of inflation, showing a 2.3-percent increase in August after a rise of 2.2 percent in July.
The data “add to the evidence that underlying eurozone inflationary pressures remain very low and that the ECB has ample scope to eventually take interest rates lower if it feels the need to act,” Archer said.
Nevertheless, the ECB will unlikely act as soon as next week when it holds its October policy meeting, analysts said.