FRANKFURT: Banks cut lending to euro zone companies in February while those in Spain and Italy stocked up on government bonds, suggesting the flood of cash that the European Central Bank has pumped out has yet to bolster flagging businesses in the wider economy.
The monthly flow of loans to non-financial firms fell by 3 billion euros ($4 billion) after rising by just 1 billion euros in January. The flow of loans to households was unchanged.
Euro zone M3 money supply a more general measure of cash in the economy - grew at an annual 2.8 percent in February, accelerating from 2.5 percent in January. A Reuters poll had pointed to a reading of 2.4 percent.
The lending figures, released on Wednesday, were a blow to the ECB's efforts with its 3-year funding operations or LTROs to unclog the banking system and encourage an increase in lending to companies, which have been starved of investment funds.
Global Insight economist Howard Archer said the drop in lending to firms and flat lending to households "fuels concern that the 489 euro billion loaned to European banks by the ECB in a three-year unlimited tender in December has not so far at least - fed through to boost lending to the private sector."
The ECB flooded the financial system with 489 billion euros of cheap three-year funds in the first of the twin operations late last year, adding another 530 billion euros at the second operation on Feb. 29.
The February lending data would not have shown the impact of the second big loan handout, Archer said.
"We no longer expect the ECB to cut interest rates further, although we actually believe that there is a decent case for the ECB to do so given the ongoing very real possibility that the euro zone will suffer gross domestic product contraction in both the first and the second quarters of this year."
ECB President Mario Draghi is under pressure from a German-led group of ECB policymakers pushing for the bank to prepare an exit less than a month after it completed the second of the twin LTROs, which dousing the euro zone crisis at least temporarily.
Draghi said after the first LTRO it had avoided a "major, major credit crunch". Since the second took the total of the twin measures to over 1 trillion euros, he has been at pains to allay German concerns that the liquidity could fuel inflation.
"The tentative signs we are seeing of a stabilisation in money and credit growth do not signal increasing inflationary pressures over the medium term," he said in Berlin on Monday, adding that the ECB stood ready to keep prices in check.
Orthodox economists in Germany worry that pumping money into the economy will inevitably lead to price rises. Germans' angst about inflation stems from the national experience of hyperinflation in the 1920s, when money became all but worthless and it took a wheelbarrow full of notes to buy a loaf of bread.
BOND BONANZA
Draghi stressed on Monday the 3-year loans were aimed at preventing a credit crunch, not supporting sovereign debt markets.
However, the ECB figures showed that Spanish as well as Italian banks increased their monthly net purchases of government bonds in February.
The new data, which captured the period just before ECB's record second injection of 3-year cash, showed Italian banks increased their holdings of securities issued by euro zone governments by a record 23 billion euros, taking their total holdings to 301.6 billion euros.
Spanish banks increased their holdings of securities issued by euro zone governments by a hefty 15.7 billion euros. While the rise was smaller than January's record 23 billion, it left total sovereign holdings at a record 245.8 billion euros.
The data do not break down banks' holdings by issuing country but the presumption is they focused on domestic debt.
Overall money growth in the currency bloc also pointed to a slow recovery in the tight credit conditions at the end of last year that led the ECB to embark on the 3-year funding operations.
Euro zone M3 money supply - a more general measure of cash in the economy grew at an annual 2.8 percent in February, up from 2.5 percent in January.
Comments
Comments are closed for this article.