Corporate lending by Eurozone banks increases



Increased lending by banks in the Eurozone in November raised hopes that the EU’s economic recovery will be accelerated through a rise in credit. This is a welcome reversal from the disturbing trend of falling credits month-on-month seen for the last couple of years.

Numbers published by the European Central Bank on Wednesday showed that advances forwarded in November to companies in the 16 member union rose by 0.2 percent or €11 billion over the previous month.

This is in stark contrast to October, which had witnessed a €10 billion drop over September. This supports the ECB opinion that recovery of the EU has started. Loan disbursal has actually grown in the last three out of four months.

Economists however are being cautiously optimistic, saying this indicates that the region’s crisis hit banks are willing to sanction loan to less risky ventures.

Howard Archer, an economist at IHS Global Insight said: “This is a welcome, limited step in the right direction. This raises hopes that euro zone banks may be becoming more willing to lend to what they perceive to be less risky businesses”, adding “It also hints that there has been a limited increase in companies looking to borrow to finance investment and business plans in reaction to recent improved activity”.

However, Josef Trischler – managing director of German engineering association VDMA said: “There is a string of companies that do not get banks loans at all or only to unacceptable conditions”.

Non-financial companies recorded enhanced demand for credit, ECB data showed. This indicates that manufacturing and service sector companies are willing to undertake capital expenditures in anticipation of an early recovery.

Germany, which is leading the Eurozone recovery showed maximum growth in estimated capital expenditures. However, on yearly basis, corporate borrowing is still lower by 0.1 percent over November 2009.

Loans to private sector grew by 2 percent – year on year, the fastest recorded since April 2009.  Michael Schubert – an Economist at Commerzbank indicated that the current growth is lower than historically recorded saying: “Loan momentum remains rather weak, so that we continue to expect the ECB to leave rates unchanged over a long time span”.

Holger Schmieding – an Economist at Berenberg Bank thinks the reason for slow growth in credit is different. Since the collapse of Lehman Brothers, companies have increased cash holdings and are flush with funds now. The private sector and domestic households have increased their cash and overnight deposits by 20 percent, he argues.

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