Eurozone lending to private sector declines

The eurozone saw the first year-on-year fall in bank lending to the private sector last month, even as signs became stronger that the 16-country region’s economy had returned to growth.

September’s eurozone credit numbers indicated lending had been scaled back at an unprecedented pace, strengthening the case for the European Central Bank to maintain its ultra-loose interest rate policy.

Loans to the private sector contracted at an annual rate of 0.3 per cent, after a 0.1 per cent rise in August, according to the ECB. That was the first time the annual growth rate had turned negative since comparable statistics began in 1992. The euro was launched in 1999.

Although the data showed signs of a pick-up in lending to households in September compared with August, they could fuel policymakers’ fears that a weakened banking sector will fail to provide business with the credit needed to reboot the economy.

“A lack of credit growth could certainly undermine the pace of recovery,” said Colin Ellis, European economist at Daiwa Securities SMBC Europe. Unlike the UK, the eurozone is thought by economists to have expanded in the third quarter compared with the previous three months, marking the formal end of its recession.

Purchasing managers’ indices last week suggested growth had continued into the final quarter of the year. The ECB remains wary about the strength of the recovery, however, and argues that it will take time before the extra emergency liquidity it has pumped into the banking system feeds through into a pick-up in lending. In a downturn, companies typically draw on internal resources and delay investment plans. “To get a fully fledged business cycle upswing emerging, you need to see credit taking off – but that normally takes one or two years,” said Julian Callow, European economist at Barclays Capital.

But Mr Callow argued that the latest data might have been distorted downwards by banks securitising loans, which would have removed them from the ECB’s statistics even though the credit was still available to the economy.

The ECB’s main interest rate is widely expected to remain at the record low of 1 per cent well into next year. But at its meetings next week and in December, the ECB’s governing council will have to start considering whether to extend emergency measures implemented after the collapse of Lehman Brothers last year.

Eurozone companies on balance repaid €4bn ($6bn, £3.6bn) in borrowings last month, according to data. In the past 12 months, the biggest slowdown has been in loans of up to a year, which in September were almost 10 per cent lower than a year before.

The ECB may take encouragement from a month-on-month €14bn pick-up in lending to households last month. Still, lending to households was 0.3 per cent lower than a year before, compared with a year-on-year contraction of 0.2 per cent in August.

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