Banks report restrictive lending terms for business

IRISH BANKS reported “more restrictive” lending terms for business loans in new euro zone research, which found the prospects for future loan demand in the single currency area to be “generally subdued”.

One week after EU leaders sought to contain pressure on indebted euro zone countries by expanding the operations of their bailout fund, Italy paid the highest rate of interest for more than a decade on the sale of a 10-year bond.

Further evidence of strain emerged in a separate survey which showed a greater than expected drop in economic sentiment in the euro area, threatening a slowdown in Europe’s nascent recovery from the worst economic crisis since the second World War.

Extracting Irish findings from a quarterly bank lending survey by the European Central Bank, the Central Bank of Ireland said credit standards for business and household loans were unchanged in the second quarter of the year. This continued a trend dating back to mid-2010.

With loan demand from enterprises decreasing in the second quarter, the bank said a further decline in demand for business loans was anticipated for the third quarter.

“Most of the factors impacting credit standards that banks were asked to evaluate were unchanged. However, more restrictive lending terms and conditions were reported,” it said.

The bank reported an increase in mortgage demand or loan demand from households for house purchases, while demand for consumer loans declined.

“Most of the factors affecting household loan demand that banks were asked to evaluate were unchanged, although less favourable housing market prospects and lower levels of consumer confidence was reported.”

The ECB said euro zone banks generally reported a slight decline in net tightening of credit standards for business and consumer loans in the second quarter.

“Looking ahead, prospects for loan demand remain generally subdued,” the ECB said.

“While 8 per cent of the participating banks expect a net increase in demand for loans to enterprises, they anticipate a decrease in demand for housing loans (minus 12 per cent in net terms), and a slightly less negative net demand for consumer credit (minus 4 per cent in net terms) in the third quarter of the year.”

The survey was released as Italy paid an interest rate of 5.77 per cent to sell €2.7 billion of its 10-year bonds, the highest since 2000.

The country also sold €3.5 billion of three-year bonds at 4.8 per cent, the highest since July 2008.

The sale came amid speculation that economy minister Giulio Tremonti might resign over his use of an apartment which belongs to an aide under investigation for alleged corruption.

However, a cabinet colleague said there was no threat to Mr Tremonti, who is seen in markets as a crucial counterweight in the government to prime minister Silvio Berlusconi.

The European Commission’s monthly economic sentiment barometer showed that the greatest decline in confidence was in Italy followed by Spain, which is also under pressure in the debt crisis.

“In the euro area the fall resulted from a decline in confidence in all sectors, with strong losses in industry and services,” the commission said.