U.S. Markets open in 8 hrs 10 mins

Eurozone bank lending falls again

David Mchugh, AP Business Writer

FRANKFURT, Germany (AP) -- The European Central Bank faced more pressure Wednesday to cut interest rates and find new ways to stimulate the economy after a key indicator showed weaker bank lending to companies and a leading international organization urged it to act to support growth.

The ECB said Wednesday that loans to non-financial corporations across the 17 European Union countries that use the euro decreased by 1.9 percent from a year ago, even worse than the 1.3 percent fall recorded in the previous month. The figures reflect the weak eurozone economy, which shrank a further 0.2 percent in the first quarter.

The drop in credit activity is due both to banks' reluctance to lend and many companies' wariness of borrowing. Either way, it's a sign of continuing economic weakness. The ECB has said it expects a gradual economic recovery to start in the second half of the year, but as signs of growth remain scarce it is facing growing calls to stimulate the economy.

ECB President Mario Draghi says the central bank is looking for ways to unclog bank lending to small and medium size companies. Early this month, it cut its benchmark interest rate to a record low of 0.5 percent. However, it noted that low rates are not being passed on by banks, which are charging companies higher rates to account for economic uncertainty.

The ECB has already used several of its key tools to try to stabilize the eurozone. Besides cutting its benchmark rate, it loaned more than 1 trillion euros ($1.3 trillion) in low interest, 3-year loans to banks in 2011 and 2012. It has also offered to purchase bonds issued by indebted countries such as Spain and Italy, provided those countries promise in writing to take steps to cut debt. So far, the ECB has not bought any bonds as part of this program since no countries have made requests for help. But the mere offer has lowered borrowing costs for governments and calmed fears of a disastrous government default or eurozone breakup.

Many economists think the bank will cut its key interest rate again, if not at its June 6 meeting then during the next several months. The ECB is also talking to the European Investment Bank about a way to encourage banks to have small business loans bundled together and sold off in the form of bonds, which could make more money available to lend.

The OECD on Wednesday urged the ECB to take the unusual step of cutting to below zero the interest rate it pays banks for depositing money with it. In practice, that means banks would have to pay to deposit money at the central bank. The idea is that would push banks to lend money rather than hoard it as super-safe central bank deposits.

The OECD, which represents many of the world's richer countries, said the ECB should issue clear guidance — as the U.S. Federal Reserve does — on how long its exceptional measures, such as very low interest rates, will remain in place.

The Paris-based group even urged the ECB to consider buying bonds — a tool that can ease borrowing costs and increase the supply of money in the economy, but one that the central bank has so far been reluctant to use.

The ECB is politically independent and is prohibited by the basic EU treaty from taking advice from governments.

The Fed, Bank of England and Bank of Japan have all used bond purchases to boost growth, but the ECB has limited itself to a temporary bond purchase program that had little effect. That was discontinued last year, as the ECB prepared the current bond purchase program, which has not yet been used.