Euro zone credit slump deepens

Loans to the euro zone's private sector shrank by more than expected in June, starving the economy of the funds needed to sustain recovery and piling pressure on the European Central Bank to take fresh action.

Loans to the private sector shrank by 1.6 per cent from the same month a year ago, ECB data released today showed, a bigger fall than even the lowest forecast of -1.1 per cent.

The latest weak lending figures highlight one of main obstacles to recovery in the euro zone, where purchasing manager indexes (PMI) showed private industry expanded for the first time in more than a year in July.

Lacklustre demand is dragging on the appetite for credit, while banks restrain lending to repair their balance sheets.

In a step to reviving lending to the bloc’s struggling small- and mid-sized businesses, the ECB said last week it would let banks use more of the assets once blamed for triggering the financial crisis as collateral for cheap loans.

Howard Archer, economist at Global Insight, said the weak lending figures heaped pressure on the ECB to do more. "The further marked fall in lending to

euro zone businesses in June maintains pressure on the ECB to come up with concrete measures aimed at improving credit availability to companies, especially small and medium-sized ones,” he said.

“We think it is very possible that the ECB will eventually take its key policy rate down from 0.50 per cent to 0.25 per cent as we anticipate that the euro zone will continue to find it very tough to develop clear growth,” he added.

The ECB holds a policy meeting next Thursday. No change in interest rates is expected. An ECB survey released yesterday showed that euro

zone banks, facing tougher capital requirements, tightened lending standards for both companies and home loans in the second quarter even though their access to funding eased.

Seeking to reassure markets unnerved by the US Federal Reserve’s exit plan from money printing, the ECB said earlier this month it would keep interest rates at record lows for an extended period and may yet cut further.

ECB policymakers have since qualified this forward guidance, with Bundesbank chief Jens Weidmann said on July 11th the ECB had not "tied itself to the mast".