Year-on-year lending falls for first time in euro zone

LENDING TO households and companies in Europe fell on an annual basis for the first time last month as the economic slump slashed demand for credit and made banks more reluctant to advance money.

Loans to the private sector fell 0.3 per cent year-on-year, the European Central Bank (ECB) said yesterday. This was the first fall since data was first collected in 1991.

However, there was a small pick-up in lending in September compared to August, which economists said was a sign that credit was starting to flow again.

But as the flow of credit is still quite weak, the ECB is unlikely to be in any rush to raise its key lending rate from its current record low of 1 per cent or drop the emergency liquidity measures introduced to counter the financial crisis, many of which are due to expire at the end of 2009.

Growth in broad money supply (M3), which the ECB uses as a gauge of future inflation, slowed to 1.8 per cent in September, the lowest rate every recorded, as the global recession curtailed demand for new debt.

The ECB’s statistics reflect the pattern of decline. The latest figures from the Central Bank show that private-sector credit in the Irish economy fell by €1.5 billion in August, the sixth consecutive month of decline.

However, private-sector credit is contracting at an annual rate of 3 per cent in Ireland, far ahead of the overall euro zone rate of decline, indicating the extent to which the Irish economy is underperforming the euro zone as a whole.

Irish financial institutions’ use of the euro zone’s M3 money supply is falling at an annual rate of 1.1 per cent, but the rate of decline has slowed down markedly in recent months.

Fresh Central Bank data for the month of September will be published on Friday.

Meanwhile, European government bonds rose as stock market losses increased demand for fixed-income investments amid evidence that the economic recovery may falter.

Consumer confidence in the US deteriorated by more than expected, according to new figures, which put pressure on equities.

Irish banks led the decline on the Iseq index, with AIB plunging 11.5 per cent in trading to close at €2.10, and Bank of Ireland plummeting 10.2 per cent to finish the session at €2.20.

The disappointing US data bodes ill for a recovery because it indicates lower consumer spending, which accounts for 70 per cent of the economy. Without US consumers, the world economy is also unlikely to recover as swiftly as hoped.

However, oil rose above $79 a barrel as rising gasoline demand in the US helped investors shrug off a drop in consumer confidence in the world’s biggest energy user.

Crude oil gained even as the dollar strengthened against other currencies in afternoon trade. The dollar hit a two-week high against the euro after deteriorating consumer confidence increased the appeal of the dollar as a safe haven for investors. The pound also strengthened against the euro to as much as 90.30 pence per euro yesterday evening. – (Additional reporting: Bloomberg/Reuters)