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ECB says demand for loans remains weak

By David Mchugh

Associated Press

Published: Wednesday, April 25 2012 4:35 a.m. MDT

European Central Bank President Mario Draghi, center, smiles as he arrives to address the committee on economic and monetary affairs at the European parliament in Brussels, Wednesday April 25, 2012.

Geert Vanden Wijngaert, Associated Press

FRANKFURT, Germany — European banks, flush with cheap credit from the European Central Bank, are making it easier for consumers and companies to get loans — but demand for credit is remains very low due to worries over the region's economic prospects.

The ECB's closely watched survey of lending practices released Wednesday indicated a substantial thawing of credit conditions among banks since it gave them €1 trillion ($1.3 trillion) in cheap loans.

On paper, that is a hopeful sign for the European economy as it struggles with a crisis over too much government debt. However, the survey also indicates businesses and households are not applying for that credit because they are concerned about the outlook for the eurozone economy, which is expected to shrink 0.3 percent this year according to EU forecasts. In particular, banks said they saw less demand from consumers for mortgage loans and from businesses for credit to expand their plants and equipment.

The survey showed that far fewer banks had tightened their loan standards in the first three months of the year compared with last year. Of 131 surveyed banks, only a net 9 percent said they had made their lending practices tougher.

That's a significant improvement from a net 35 percent that tightened credit in the fourth quarter of last year, when markets were seized with fear that a large eurozone country such as Spain or Italy might default on its debts. That feared financial collapse didn't happen, and market conditions improved after the ECB made huge amounts of cheap credit available to banks on Dec. 21 and Feb. 29.

ECB head Mario Draghi said the survey indicated that restraints on the supply of loans "have decreased considerably."

However, "we see demand still very, very weak for credit," Draghi said, adding that lending was likely to remain subdued "for some time" because of a slow eurozone economy.

The ECB's massive loans supplied banks with plentiful cash, many of them small banks that loan to the small and midsize companies that provide most eurozone jobs. That means "central bank lending has come very close to the real economy," Draghi said.

But the money won't reach businesses and consumers until they see a reason to ask for it. Demand for loans from both businesses and households remains low, a fact the ECB cannot directly affect through its monetary policies.

"We cannot replace the lack of demand," Draghi said before the European Parliament's committee on economic and monetary affairs.

He declined to say if the bank would make more cheap long-term loans to banks. He said "We never precommit."

The ECB's loans, handed out in two batches to banks on Dec. 21 and Feb. 29, are credited with ensuring banks had enough funds to operate with and removing fears of a bank collapse that could have further shaken the eurozone. However, the calming effect on markets has evaporated in recent days, with investors demanding higher interest rates to loan money to Spain and Italy.

The increasing market tensions have led to calls for the ECB to do another series of loans, dubbed longer-term refinancing operations, or LTROs. Draghi and other ECB officials however have stressed that it's up to governments to reduce their deficits and improve prospects for growth by cutting excess regulation that discourages hiring and starting businesses. They say the LTROs only gained governments time to do that.

Commerzbank economist Michael Schubert said the easier credit conditions "probably confirm the ECB council members' view that for the time being there is no need for a further long-term tender operation."

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