Eurozone lending drop reveals recovery risk: analysts

(FRANKFURT) - A steep fall in eurozone lending even though the amount of money available rose slightly in January highlights a serious risk to Europe's fragile finances and recovery, analysts say.

Loans to the private sector shrank by 0.6 percent in January, the European Central Bank reported Thursday, while money supply as measured by the bank's M3 indicator increased by 0.1 percent.

The rate of contraction in loans was much sharper than December's drop of 0.1 percent, and came as a survey of eurozone business and consumer sentiment showed the bloc shifting into reverse after a 10-month rebound in confidence.

"The eurozone recovery is clearly struggling for momentum," said Howard Archer, chief European economist at research group IHS Global Insight.

Deutsche Bank economist Gilles Moec noted that in addition to a "corporate lending strike" seen in the ECB data, banks "have seemingly started to shy away from financing the soaring government deficits" in many eurozone counties.

"The next move could be a return to foreign lending," he suggested, which would undermine ECB efforts to supply the 16-nation eurozone with credit needed for recovery and drive up rates on government debt, making it harder to resolve Greece's debt crisis.

The ECB has lent commercial banks unlimited amounts of cash to keep credit flowing, but "there are still few signs that the ECB's liquidity provisions are having a significant impact on the wider economy," European economist Ben May at Capital Economics said.

Along with fears over Greek debt and eurozone growth figures that were often flat or negative in the fourth quarter of 2009, the latest data seem to confirm a trend towards economic stagnation.

The ECB's M3 indicator, which measures cash, deposits and some other financial items, illustrates along with lending data the level of consumer demand and economic activity in general.

The central bank might in normal times be tempted to cut interest rates now, but the main ECB rate is already at a record low of one percent and is tipped to stay there for most, if not all, of this year.

A breakdown of the ECB data showed that although household loans pursued a modest upward trend, especially for mortgages, credit to non-financial corporations fell again, to show a decrease of 2.7 percent from January 2009.

Companies have reduced demand for credit owing to the global slowdown, but experts warn firms could find it harder to get loans now, in part because their results might begin to reflect effects of the downturn, making banks more wary of lending to them.

Banks are also now sorting out their own accounts following excessive lending that fueled the financial crisis, reducing lending further.

The ECB and other central banks will thus probably withdraw emergency supplies of cash slowly.

Thursday's data "reinforce the case for the ECB to tread very lightly in gradually withdrawing its emergency liquidity measures," Archer said.

Commerzbank economist Michael Schuber added: "As the ECB fears that limited credit supply could stand in the way of the recovery, the bank is unlikely to change track as long as there are no clear signs of a turnaround in loan momentum."

Moec warned however that if eurozone banks did not want to lend to companies and had also decided to unload government debt, they "could be tempted to expand their presence overseas."