Eurozone bank deposits drop in possible Cyprus effect

(FRANKFURT) - The level of private bank deposits in a number of eurozone countries fell in April, European Central Bank data showed on Wednesday, suggesting the botched bail-out of Cyprus dented confidence in the region.

At the same time, the ECB data showed that bank lending to the private sector in the 17 countries that share the single currency is continuing to contract as the long-running debt crisis chokes demand for credit.

As part of the Cyprus bail-out, eurozone leaders imposed losses for the first time on deposits of more than 100,000 euros ($129,000), a precedent which appears to have triggered varying degrees of deposit flight across the region.

Unsurprisingly, the country most affected was Cyprus itself, where private deposits fell by 7.3 percent in a single month to 41.32 billion euros.

The impact was also felt strongly in Greece, where private deposits fell 1.6 percent on the month.

In Spain, deposits fell by 1.5 percent to their lowest level since October, they declined by 0.5 percent in Portugal, by 0.1 percent in Ireland and by 0.3 percent in Italy.

By contrast, banks in France, Germany, Belgium, Austria, Estonia and Slovakia all registered inflows in deposits, in line with their recent trend.

"The eurozone's risky Cyprus bail-out may have at least temporarily hurt trust in the banking systems in other peripheral countries," said Berenberg Bank economist Christian Schulz.

The drop in deposits in April broke a positive trend that had begun to emerge last autumn after the ECB announced its OMT bond purchase programme, Schulz said.

He conceded that the data may have been distorted somewhat by a calendar effect, such as the timing of the Easter holidays.

"The broader financial market reaction since late March suggests that any contagion from the Cyprus bank restructuring and Italy's political turmoil has faded," Schulz said.

"The ECB's rescue shield has proved its resilience and the gradual healing of the financial system should resume. But to accelerate the end of the recession, eurozone policy makers should do more to improve confidence and ease credit access for small firms in the reform countries," he said.

--- Lending data 'ramps up pressure on the ECB' ---

ECB data also showed that eurozone bank loans to the private sector declined by 0.9 percent in April compared with the same month in 2012 after already shrinking by 0.7 percent the previous month.

The ECB has long argued that falling loans to the private sector reflects weak demand for credit rather than tight lending conditions and is currently mulling ways of kick-starting lending activity to small and medium-sized enterprises (SMEs).

According to the ECB's calculations, lending to businesses declined by 18 billion euros ($23 billion) in April "clearly reflecting an ongoing combination of limited supply and muted demand," said IHS Global Insight economist Howard Archer.

The decline "ramps up pressure on the ECB to come up with concrete measures aimed at improving credit availability to companies, especially small and medium-sized ones," Archer said.

"This is clearly a major focus for the ECB at the moment, as it looks to expand its policy toolbox to try and help overcome different financing conditions across the eurozone," he said.

The ECB also published eurozone money supply data, which suggest that growth in the money supply -- a key guide to future inflation -- picked up last month.

Growth in the M3 indicator, which measures the amount of money in circulation, grew by 3.2 percent in April, compared with 2.6 percent in March.

The ECB regards the M3 figure as a key guide to inflation pressures and uses it to set interest rates accordingly.

Archer said that at 3.2 percent, money supply growth remains muted, "adding to the evidence that eurozone inflationary pressures are very low."

Consequently, there was ample justification and scope for the ECB to take further stimulative action to try and support eurozone economic growth, "and we expect this to include an interest rate cut from 0.50 percent to 0.25 percent," the expert said.

"This could even happen as soon as the ECB's June 6 policy meeting."

The OECD on Wednesday urged the ECB for easier monetary conditions, even after the European Central Bank cut its key interest rate by a quarter point this month to an all-time low of 0.50 percent.

"Expansion of asset purchases is desirable and different options for such interventions exist..." the Organisation for Economic Cooperation and Development said.