Weak lending in Europe hinders recovery of Covid-19

Demand for business loans in the eurozone has plummeted and banks tightened credit standards in the first quarter of this year, a toxic combination that calls into question the bloc’s slow economic recovery from the pandemic.

According to the latest European Central Bank loan survey released on Tuesday, business demand for loans and lines of credit declined for the third quarter in a row. The ECB has said companies appear to be postponing their investments as the pandemic triggers new lockdowns and other restrictions in many parts of Europe.

European companies tend to rely more on bank loans than their American counterparts. This makes loan demand and supply a key indicator of the health of the region’s economy, closely monitored by the ECB when framing its monetary policy.

The austere investigation weighed on the financial markets on Tuesday. An index of stocks of banks in the euro zone fell by more than 2%. Yields on the benchmark 10-year German bunds slipped to minus 0.25% from minus 0.24% a day earlier.

“When there is less appetite on the supply side with banks not wanting to expose themselves to the national economy, and on the demand side where companies have no visibility on the timing of the opening up the economy is not a good recipe for an economy dependent on the banking system, ”said Shaniel Ramjee, multi-asset fund manager at Pictet Asset Management.

Slow lending will be seen as a frustration for the ECB, which has triggered a massive economic stimulus through the purchase of bonds, cheap loans to banks and negative interest rates, as a way to counteract the effects of the pandemic. It accelerated its bond buying program in March, in part to combat tighter credit conditions.

The ECB’s policy-making committee meets on Thursday, where it is not expected to make any changes. Tightening credit conditions in the first quarter move the eurozone away from a rapid recovery to pre-pandemic levels, said Bert Colijn, senior economist at ING.

Philip Lane, the ECB’s chief economist, has in the past warned of the risks of a “mutually reinforcing adverse loop” in which banks view falling demand for loans as a negative signal on the state of the economy, and businesses are seeing their concerns confirmed by tighter borrowing conditions.

The central bank investigation showed that banks tightened their lending guidelines and approval criteria for new business loans in the first quarter, although the tightening was less pronounced than in the previous two quarters. . The actual terms set for approved loans remained unchanged from the fourth quarter. The ECB said margins on average loans have narrowed due to competition among lenders, although margins on riskier loans have widened.

For the second quarter, banks expect a similar tightening in credit standards, as demand is expected to rise as businesses struggle to pay their bills during further lockdowns, the ECB said.

“Perceptions of risk related to the deterioration of the general economic situation and specific to companies became considerably weaker but continued to be the main factor contributing to the tightening of credit standards on business loans,” the ECB said.

Write to Patricia Kowsmann at [email protected]

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Appeared in the print edition of April 21, 2021 under the headline “Weak lending hurts EU rebound”.

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