PRODUCT PROFILE

Latest Dublin Prices

ECB pressure as eurozone lending falls

Friday, June 29 10:25:46

Loans to euro zone households and firms shrank in May, raising pressure on the ECB to take further action to support the economy after government leaders agreed some steps at their latest summit.

Loans to the private sector fell 0.1 percent in May from the same month a year ago, ECB data showed. That compared with a Reuters poll forecast for 0.1 percent growth.

Banks have tightened credit terms in response to the euro zone debt crisis, but weakening growth has also dampened demand for loans from businesses and households. Fears over the future of the currency union have weighed further.

"The ECB should do something," Christian Schulz of Berenberg Bank said.

"But it should also think about whether the existing tools of rates cuts and maybe liquidity provision are enough or whether they should potentially think about addressing the actual underlying problem, which is the euro zone crisis and potentially even buy sovereign bonds directly."

Euro zone leaders agreed on Friday to take emergency action to bring down Italy's and Spain's spiralling borrowing costs and to create a single supervisory body for euro zone banks by the end of this year, a first step towards a European banking union.

ECB President Mario Draghi can expect to be pressed on what role the bank will play next Thursday after the ECB's interest rate decision. A Reuters poll showed that 48 out of 71 economists expect the ECB to cut rates, making it more attractive for households and firms to borrow.

In the same poll, 19 out of 43 economists thought the ECB would come up with more cheap long-term refinancing operations (LTROs) after calming markets early this year with over a trillion euros in 3-year loans.

Although the move helped avoid a credit crunch at the time, the debt crisis flared up again within months and the loans failed to revive lending to the real economy. The monthly flow of loans to households was 2 billion euros compared with last month's 7 billion euro. Loans to non-financial firms fell by 10 billion euros on the month after jumping by 7 billion euros in April.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 2.9 percent in May, picking up from 2.5 percent in April and well above the consensus expectation of 2.3 percent growth of analysts polled by Reuters.