Lending data points to euro-zone credit crunch

FRANKFURT (MarketWatch) — The long-feared euro-zone credit crunch appears to be under way, economists said Friday after December data showed a sharp slowdown in private bank lending and broad money supply growth.

The European Central Bank said loans to the private sector grew at a 1% annual rate in December, slowing from 1.7% in November and 2.7% in October. Economists had forecast growth of 2.1%.

The lending data “points to the first conclusive signs of an outright credit crunch emerging in Europe,” said James Nixon, European economist at Societe Generale.

Money-supply growth also slowed. M3, the broadest measure of money supply, grew at a 1.6% annual pace in December, slowing from 2% in November. A breakdown of the lending data showed that loans to the corporate sector dropped 37 billion euros ($48.6 billion), the largest ever one-month decline, while loans to households shrank by €10 billion and net mortgage lending fell by €7 billion.

The euro, buoyed by optimism over prospects for a deal between the Greek government and private creditors on a voluntary write-down of Greek debt, traded 0.5% higher versus the dollar at $1.3151.

The European Central Bank injected nearly half a trillion euros into the banking system via three-year loans in December as it conducted a long-term refinancing operation aimed at easing funding pressure on banks and averting a credit crunch. Another operation is set for February.

Turmoil created by the euro-zone’s sovereign debt crisis has contributed to tensions in the banking sector as worried institutions hoard cash despite the ECB’s liquidity efforts. Many economists have feared that funding worries combined with pressure to meet tougher capital requirements would lead banks to significantly scale back lending to the private sector.

The ECB, however, has so far remained relatively confident that a significant credit crunch could be avoided.

Earlier this month, the ECB Governing Council said “the figures on lending do not so far suggest that the heightened financial market tensions led to a sizeable curtailment of credit in the euro area,” but pledged “close scrutiny” of credit developments.

The December data are likely to trigger a “bout of introspection” at the ECB, said James Ashley, senior European economist at RBC Capital Markets.

“We expect next month’s statement to be notably more circumspect in its description of money/credit dynamics. As a result, at next month’s monetary policy meeting, the Governing Council will need to weigh its inevitable concerns over the money/credit data against the continued tentative signs of stabilization,” Ashley said, in a note.

But Martin van Vliet, economist at ING Bank in Brussels, said the ECB’s injection of three-year loans in late December should help ease supply constraints going forward. Still, the data underline the lack of any inflation threat in the euro zone and suggests investors shouldn’t “get too far carried away by the tentative signs of improvement in the economic situation,” he said.