Credit Squeeze and Bank Lending in the Eurozone

From the FT this morning:


Credit squeeze fails to dent eurozone borrowing

By Ralph Atkins in Berlin

Published: November 28 2007 15:03 | Last updated: November 28 2007 15:03

The global credit squeeze has had little or no impact on business and consumer borrowing in the eurozone, European Central Bank data suggested on Wednesday, with the effects of the recent financial turmoil yet to feed through into the 13-country economy.

Loans to non-financial businesses grew at an annual rate of 13.9 per cent in October, unchanged from the previous month, and one of the fastest rates since the launch of the euro in 1999, according to the ECB’s credit and money supply figures. Lending to consumers had started to slow before the credit crunch hit in August but in October still grew at an annual rate of 6.8 per cent – also unchanged from the previous month.

That appeared at odds with recent the latest ECB survey on bank lending conditions, released last month, which had reported a significant toughening of credit standards applied by banks.

The conflicting evidence highlighted the quandary facing the European Central Bank. Inflation is rising sharply – November’s figure published on Friday is expected to be far above its target of an annual rate “below but close” to 2 per cent – which would otherwise have strengthened the case for higher interest rates.

But the ECB is still fighting to calm tensions in money markets, where three-month interest rates remain stubbornly high. The large appetite for funds was highlighted in the ECB’s latest regular auction for three-month money yesterday, where banks submitted €132.4bn of bids for the €50bn allotted.

Meanwhile, the extent of the macro-economic impact of the global credit squeeze and the euro’s record strength remain unclear. Robert Barrie, economist at Credit Suisse, argued that October might have been too early to see effects on lending data. But higher market interest rates, and a sharper-than-expected US slowdown added to the threats. “It is very easy to draw up quite a list of downside risks to growth. If they all materialised, growth would slow a lot,” he said.

As a result of the conflicting pressures, the ECB is expected to hold its main interest rate unchanged next week at 4 per cent – and financial markets expect it to remain on hold for much of 2008

The latest data showed annual growth in M3, the broad money supply measure, accelerating to a record 12.3 per cent in October. M3 is watched closely by the ECB as an inflation early warning signal. But its growth might have been exaggerated by a flight to liquid assets as a result of recent financial market turmoil.

The figures on lending to business might also have been distorted by recent events with growth rates exaggerated if loans had built up on banks’ books because they had failed to securitise deals as in past. Nevertheless, Julian Callow, economist at Barclays Capital, argued that the ECB was likely to see the data “as suggesting no discernible impact of the credit tightening on the pace of non-financial private sector credit growth up until the end of October.”