Euro zone credit remains weak


Loans to households and companies in the euro zone posted their first annual decline on record in September as the economic slump curtailed demand for credit and made banks more reluctant to lend.

Loans to euro zone households and firms fell 0.3 per cent in September from a year earlier, the European Central Bank said today.

The first year-on-year fall in private sector lending since data began to be collected in 1991 comes despite the ECB lending banks billions of euros of extra funds and urging them to pass it on to customers. On a monthly basis, lending rose slightly.

Corporate lending shrank 0.1 per cent over the year and loans to households fell 0.3 per cent.

The figures also showed annual growth of M3 money supply - a broad measure of money available to spend - slowed to 1.8 pe rcent from 2.6 per cent in August, below the 2.2 per cent growth forecast  by experts.

The global recession has eroded demand for new debt and made banks reluctant to lend. While the economy of the 16 nations sharing the euro may have resumed expansion in the third quarter, growth is likely to remain muted unless credit flows improve and companies and households increase spending.

The ECB has cut its benchmark interest rate to a record low of 1 per cent and is flooding banks with cash in an effort to revive lending.

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," said Ben May, European economist at Capital Economics Ltd in London.

Additional reporting by Bloomberg