European lending lags, sign recovery remains weak

AP News
Posted: Jan 03, 2014 7:05 AM
European lending lags, sign recovery remains weak

FRANKFURT, Germany (AP) — New figures show that European banks are lending less to companies — another sign the continent's economic upswing remains less than robust.

The European Central Bank reported Friday that loans to companies slipped by 3.1 percent in November from a year earlier. The drop was sharper than the previous month's 3.0 percent.

Analysts say banks can be reluctant to lend given uncertain growth prospects that mean increased risk they won't be repaid. Some companies, meanwhile, may not want to risk borrowing. Others don't need credit because they are sitting on adequate cash reserves — but don't yet see a reason to invest that cash in new production.

The economy of the euro currency union — a bloc that grew from 17 to 18 members in the new year with Latvia's accession — expanded by only 0.1 percent in the third quarter last year, with unemployment at 12.1 percent. Governments' efforts to reduce debt by cutting spending and raising taxes have weighed on growth.

Analyst Howard Archer at IHS Global Insight said the weak figures increased pressure on the ECB to add stimulus to the economy in the coming months. He said the ECB could offer cheap, long-term loans to banks on the condition the money is used for lending.

Archer expects the ECB to keep its benchmark lending rate at the current record low of 0.25 percent "through to 2015, although it is not inconceivable that it could trim it to 0.1 percent or even 0.0 percent."

Lower interest rates can stimulate growth. But the problem is the ECB's already-low benchmark rates are not being passed along by banks. So the ECB is looking at other measures, such as the targeted loans.

Analyst Michael Schubert at Commerzbank said that providing such loans could be complex, noting some ECB officials have expressed concern about interfering in banks' market-based decision-making. Those considerations "suggest that for now the ECB council will remain in wait-and-see mode," he said in a note to investors.

The ECB's rate-setting council meets Thursday. Several analysts said no rate change is expected.