Fears of eurozone credit crunch grow

Fears of an emerging credit crunch in the eurozone increased on Friday as data showed a sharp slowdown in bank lending to the private sector, despite recent unprecedented injections of liquidity. The European Central Bank calculated in regular monthly data that growth in loans to the private sector slowed substantially to just 1.0 percent in December from 1.7 percent in November. Last month, in a series of special liquidity measures precisely to avert a credit crunch in the 17 countries that share the euro, the ECB launched its longest-ever liquidity operations, lending eurozone banks as much as they wanted for a period of three years at super-cheap rates. And banks in the region queued up in their hundreds to borrow nearly half a trillion euros in the first-ever such operation. Nevertheless, there have been concerns that banks are simply hoarding the cash, rather than lending it to businesses and households as the ECB hoped they would. Ever since then, daily ECB data show that banks are parking record amounts of cash in the central bank's overnight storage facility. In normal times, banks shy away from depositing cash at the ECB, preferring to lend any overnight surplus to other banks, where they win a higher return. But analysts say the eurozone debt crisis has spawned a lack of trust between banks, meaning that institutions are opting to store the money at the ultra-safe ECB rather than take the riskier route of lending it to their peers. Analysts therefore viewed the latest loan data with some degree of concern. "The sharp moderation in annual growth in loans to the private sector in December, particularly the appreciable monthly fall in loans to businesses, will reinforce concern that credit conditions are now increasingly tightening and posing a mounting risk to already struggling eurozone economic activity," said IHS Global Insight's chief economist Howard Archer. Christian Schulz, senior economist at Berenberg Bank, agreed. "Signs of a modest credit crunch in the eurozone are amplifying," he said. Analysts noted, however, that it would take some time yet for the liquidity measures to feed through into the ECB data. "The moderation in loans to the private sector also likely reflects corporates becoming more cautious in their behaviour and in their investment plans in the current weakened and uncertain economic environment, and cutting back their demand for credit," said Archer at IHS Global Insight. "It remains to be seen to what extent the 489 billion euros loaned to European banks in the three-year unlimited tender in December ultimately feeds through to support bank lending to businesses and households," he said. The ECB also calculated that growth of the eurozone money supply, a key indicator of demand in the economy, slowed again in December, possibly opening up room for further interest rate cuts. The M3 indicator rose 1.6 percent last month, following a gain of 2.0 percent in November. The slowdown was unexpected: analysts polled by Dow Jones Newswires had been pencilling in growth of 2.1 percent for December. The ECB regards the M3 figure as a key guide to inflation pressures and uses it to set interest rates accordingly. The central bank seeks to keep eurozone inflation below but close to 2.0 percent but it stood at 2.7 percent in December. The central bank cut its benchmark interest rate by a quarter of a percentage point to 1.00 percent in December, arguing that future inflation is likely to slow as the eurozone debt crisis puts the brakes on economic growth in the single currency area.