ECB faces further pressure in eurozone

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Lending to companies in the euro zone contracted at the fastest pace on record in November, piling pressure on the European Central Bank to do more to revive the currency bloc’s economy.

The ECB has cut interest rates to a record low, pumped extra liquidity into the banking system and announced a yet-to-be-used government bond purchase programme, but the measures have so far not reached all corners of the euro zone evenly.

“Worryingly, there is still no sign of any trend change in bank lending to euro zone businesses, which heaps pressure on the ECB to act,” said Howard Archer, chief European economist at IHS Economics.

“Banks likely believe the economic situation and outlook in many euro zone countries still provides an uncertain and risky backdrop in which to lend, despite the euro zone eking out modest growth since the second quarter.”

The ECB’s upcoming health check of banks’ balance sheets is exacerbating the situation, with lenders reluctant to take on more risk and trying to slim down their loan books instead.

ECB vice-president Vitor Constancio said last month that about two-thirds of the weakness in bank lending is due to a lack of demand from firms and households, with credit supply having some impact on the slump.

The ECB is unlikely to introduce new measures when it meets next week after its president, Mario Draghi, said earlier this week there was no need for immediate action.

But over the next couple of months, the ECB could, for example, decide to stop sterilising the value of its previous government bond purchases, especially as it has now failed to take out the full amount for three weeks in a row. This would leave more liquidity in the system.

Corporate borrowing in the euro zone overall declined at the fastest pace on record, November’s 3.9 per cent drop comparing with a 3.8 per cent decline on the year in the previous month.

The biggest decline was in Spain, where lending to companies fell 13.5 per cent.