Deflated recovery

Lending to companies and private households shrank by 0.3 percent in September, a European Central Bank spokesman said, after growing by just 0.1 percent in August. Experts took the news as a sign of a possible impending credit crunch as a result of the past year's financial crisis.

There is concern among financial experts that this is an indication of the failure of the ECB's various re-financing instruments to counteract the effects of the financial crisis.

"There are still few signs that the ECB's unlimited provision of liquidity to banks is prompting any pick up in eurozone broad money and lending," Capital Economics economist Ben May commented.

The central bank is due to release its latest quarterly survey of bank lending on Wednesday and "the credit cycle remains the biggest question mark on the timing and the extent of the recovery in the eurozone," UniCredit economists Loredana Federico and Davide Stroppa wrote.

Growth of the ECB's wider M3 money supply indicator, which measures cash, deposits and various other financial items, fell to 1.8 percent in September from a revised 2.6 percent in August, the ECB spokesman said, also a record low.

Conflicting figures

A falling lending figure points to lower demand, which normally means inflation will ease and allow the ECB to cut interest rates. But the ECB's rates are already at a record low of 1.00 percent and are not expected to be cut further.

The new figures contradict recent data that business activity in the 16-nation eurozone picked up in October at its fastest rate since December 2007. At the same time, rising unemployment is threatening the possibility of a sustained recovery.

May noted, "There is little sign that conditions in the banking sector are becoming more normal, suggesting that it remains too early for the ECB to think about removing its generous liquidity provisions, let alone raising interest rates."

Creating liquidity

The ECB has made unlimited amounts of cash available to commercial banks in a bid to spur activity in inter-bank markets and increase lending to the broader economy.

But instead of distributing the money into society, the banks have held on to much of it because they are wary of borrowers' business prospects and also because they need to bolster their own weakened balance sheets.

The UniCredit economists did see some encouraging signs in the ECB data, especially in the household sector where growth in lending for home purchases appeared poised for a pick-up.

Commerzbank economist Michael Schubert noted that even if a recovery did begin in the second half of this year, "a turning point in (overall) loan growth may not be reached before early 2010."

The ECB has imposed time limits on its devices for creating liquidity in order to ease its withdrawal from the private sector once the economy has recovered from its current slump.

bk/Reuters/AFP
Editor: Chuck Penfold