Analysis: Creeping mistrust stops euro zone banks lending to peers across bloc

Fri Jun 21, 2013 6:28am EDT
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By John O'Donnell and Sakari Suoninen

BRUSSELS/FRANKFURT (Reuters) - Euro zone banks are refusing to lend to peers in other countries in the common currency bloc, signaling a worrying fall in confidence that appears to have worsened since the Cyprus bailout earlier this year, data analyzed by Reuters showed.

In a trend that could reignite fears about the euro and its banks, European Central Bank data shows the share of interbank funding that crosses borders within the euro zone dropped by a third, to just 22.5 percent in April from 34.5 percent at the beginning of 2008.

Banks are now lending to other banks across euro zone borders at only about the same rate as when the single currency was first launched, 15 years ago.

The silent retreat to within national borders is most pronounced in the troubled economies of southern Europe but is seen even in Germany.

Cross-border interbank funding of German banks was down by 11.2 percent year on year in March, equivalent to banks elsewhere in Europe withdrawing 29.5 billion euros from its biggest economy.

"We have seen the banks very much reverting to their domestic markets and not wanting to extend credit abroad," said Tony Stringer, a government debt analyst with ratings agency Fitch.

"Interbank deposits have been reduced. Confidence in banks across the euro zone has been reduced. If banks continue to struggle, then they can't extend credit to the real economy."

Euro zone banks' stock of lending to their Greek peers was a startling 68 percent lower in April than in the same month a year earlier - equivalent to 18 billion euros withdrawn. In Portugal, the decrease was roughly one quarter.   Continued...

An illustration picture shows Euro coins, photographed in Warngau April 3, 2013. REUTERS/Michael Dalder