Falling credit raises speculation ECB may act

Loans to eurozone businesses shrink as banking system struggles, pressuring ECB to act

Associated Press

FRANKFURT, Germany (AP) -- Bank loans to businesses in the struggling eurozone economy fell again in August, increasing speculation the European Central Bank may act to make more cheap credit available and help keep a fragile recovery going.

Figures released Thursday by the ECB show loans to non-financial businesses fell 3.8 percent after a 3.7 percent drop in July.

The ECB has warned that lack of affordable credit for small and medium-sized companies in some parts of the eurozone is holding back growth. The 17-country euro currency union emerged from recession in the second quarter with growth of 0.3 percent from the quarter before but the recovery remains fragile.

Credit is tight, particularly in struggling countries like Spain and Italy, because banks are still cautious about lending — and companies about borrowing — in an unsteady economy. Some banks still have strained finances.

Improving the flow of credit is key to an economic recovery as businesses borrow to expand operations so they can fill more orders and hire more people.

Analysts say the ECB could respond by making a third round of cheap, long-term loans to banks. Two earlier such lending offers — dubbed longer-term refinancing operations, or LTRO — in December 2011 and March 2012 handed out more than 1 trillion euros in low-interest loans for up to three years. That steadied the finances of banks that were having trouble borrowing elsewhere and eased market concerns that some governments might be overwhelmed by the cost of more bank bailouts.

The ECB's president, Mario Draghi, said Monday that the bank is "ready to use any instrument," including another LTRO, to keep the cost of credit down. The bank has already cut its benchmark interest rate to a record low 0.5 percent and said it will keep it at that level or lower until the economy improves.

Yet some market interest rates have risen, mainly due to expectations the U.S. Federal Reserve will tighten its monetary policy slightly in coming months. Because global markets are highly interconnected, changes in expectations in a large economy like the U.S. reverberate worldwide.

Analyst Howard Archer at IHS Global Insight said credit to companies "is clearly a major focus for the ECB at the moment."

"The ECB appears to be increasingly contemplating the provision of more liquidity through another long-term refinancing operation to help credit markets," he wrote in a research note.

Analysts say the bank could also cut its benchmark rate again if things do not improve. No cut is expected at the bank's next rate-setting meeting on Oct. 2.

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