ECB sees euro-zone credit squeeze easing

A squeeze on lending to home buyers and businesses that followed the US subprime crisis has shown slight signs of easing in the last three months, the European Central Bank said on Friday.

ECB sees euro-zone credit squeeze easing
Does Trichet see beyond the crunch? Photo: DPA

But demand for lending has also fallen and banks are still reluctant to extend credit because they think the economic climate will darken further, analysts pointed out.

The ECB’s July survey of more than 100 eurozone banks found “somewhat lower net tightening of credit standards” for businesses and for home purchases than in the first quarter of the year, it said. But the trend was still orientated towards tighter credit standards, while demand had weakened as a result of fewer corporate takeovers, slumping housing markets and falling consumer confidence, the ECB said.

“Banks are concerned with the state of the economy, that’s clearly the number one factor behind the tightening of credit standards,” Bank of America economist Gilles Moec told AFP. “They dont want to engage in too much lending because they are afraid of seeing default rates increase.”

Conditions for consumer credit had in fact become slightly tighter, the ECB said. Banks said credit standards were set to tighten further for businesses, but remain unchanged for households.

In terms of demand, banks noted a drop by both businesses and households, in the former’s case because of fewer mergers and acquisitions, less corporate restructuring and a trend towards internal financing.

A fall in demand for fixed investment loans “doesn’t bode well for the investment outlook given that this sub-index has always proven to be a good leading indicator of capital expenditure,” noted UniCredit Markets chief economist Aurelio Maccario.

Households, meanwhile, were seeking fewer loans because housing markets were under pressure and owing to deteriorating consumer confidence. The ECB questions senior loan officers at 112 representative banks to get a feel for lending conditions every four months, and has been providing money markets with plenty of cash to ensure a continued flow of credit on which business depends.

But Moec also pointed to other statistics that have shown increased bank lending until recently, and said: “What has really been striking me since last summer is the big difference in what they say they are doing and what they seem to be actually doing.”

He suggested that commercial banks could be demonstrating “a bit of strategic behaviour” aimed at getting the ECB to lower its main lending rate. To begin with, banks might seek to reassure the ECB “that credit standards are being tightened in the current circumstances,” he said.

In addition, “the banks want the ECB to cut rates. The more they are gloomy in the survey, the more it may have a bearing on the ECB’s reaction.”

ECB president Jean-Claude Trichet told a press conference on Thursday after the bank kept its main lending rate at 4.25 percent that “we have (seen) a level of loans to the private sector which is still quite dynamic.” And he added that while loan signals were clear in certain domaines, “in others they are complex,” including those regarding non-financial businesses.

Citi economist Jürgen Michels told AFP it just took time for banks’ decisions to show up in economic activity. And because the situation was very different depending on which euro-zone country you were in, German consumers might not have much to worry about, but “in countries like Spain it will get really difficult to get a new loan.”


German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.