Slow credit flows spark worries over EU recovery
LUCIA KUBOSOVA
28.08.2009 @ 09:21 CET
Bank credit to businesses in the eurozone shrank further last month despite current favorable conditions on the money markets, sparking fears over the true state of the economy in Europe.
Loans to businesses and households in July slowed to the record lowest annual growth ever, according to figures released by the European Central Bank (ECB), the main financial institution of the 16-strong currency union, released on Thursday (27 August).
The cheap money which banks received is not being passed on to firms and households (Photo: Stately Payday Loan/Wikipidea)
In the private sector, credit provided rose by just 0.6 percent compared with July 2008 while economists expected a 1.3 percent annual expansion. In June, loans to businesses amounted to the then minimum of 1.5 percent.
Economists interpret the results as a proof that banks do not provide the cheap money offered by the ECB and other institutions automatically to firms and households which could kick off investments and stronger consumption.
Since the economic crisis broke out last year, the Frankfurt-based bank has pumped a significant amount of liquidity into the eurozone's banking system, including €442 billion in one-year loans in late June. Leading politicians and financial authorities urged banks to lend the extra cash further for the benefit of the real economy.
But Thursday's figures "illustrate how fragile the ongoing recovery is," said Carsten Brzeski from Dutch bank ING, as quoted by AFP. "Of course, a strong slowdown in credit growth is quite normal when the economy is in the middle of a severe recession but the credit cycle needs to follow improved sentiment soon to get the recovery really going."
Several eurozone countries are currently reporting a boost in confidence in their economies both among consumers and firms but they are still cautious about borrowing new money for investments.
Germany, as the key motor of Europe's economy, saw a jump in positive sentiment among shoppers for the fifth consecutive month in August, according to GFK survey published on Thursday.
"Due to stable and even falling prices, consumers are currently left with more in their pockets," the GfK said in a statement, adding: "Currently these developments are apparently displacing possible fears about job security."
Similarly, the business confidence in the EU's biggest economy has also grown stronger for five months in a row.
Along with France, Germany recorded a minor growth in GDP last month, surprisingly stepping out of recession, and sparking hopes for a broader European recovery.
But the poor lending figures might prevent ECB decision-makers from slowly increasing record low interest rates as a result of other positive signs from the economy, economists suggest.
