Risk-shy banks and companies keep euro zone credit on tight leash

Thu Mar 26, 2015 12:10pm EDT
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By Sarah White and Valentina Za

MADRID/MILAN (Reuters) - The euro zone credit cycle is a whisker away from turning positive but don’t expect a rapid recovery.

Bank lending to the private sector fell 0.1 percent in February, data from the European Central Bank (ECB) showed on Thursday, dashing expectations for an increase but inching ever closer to positive growth after nearly three years of contraction.

While ECB President Mario Draghi hailed a resurgent demand from companies for credit this week on the back of his cheap loans for banks, lenders and businesses are more circumspect about the prospects for a strong upswing.

"The scope of lending is not really widening, it's more credit for the same companies," said Camilo Pereira, chairman of one of Spain's biggest garden center businesses, Fronda, which has dealings with half a dozen banks.

Banks' unwillingness to lend and businesses' reluctance to take on fresh debt have been at the heart of euro zone stagnation. A resumption of credit growth would signal a big hurdle to the bloc's recovery had been lifted.

The ECB has been throwing money at the problem, keeping interest rates at record lows and offering banks hundreds of billions of euros in cheap loans to lend more to businesses.

But funding is not a problem for the banks. Their funding costs have been down at pre-debt crisis levels for more than six months as yield-hungry investors snap up bank debt.

The problem is capital.   Continued...

Inflated euro sign is seen outside the new headquarters of the European Central Bank (ECB) in Frankfurt, January 22, 2015.  REUTERS/Kai Pfaffenbach