Business World

Loans to households and companies in Europe posted their second straight annual decline in October as the economic slump curtailed demand for credit and made banks more reluctant to lend.

Loans to the private sector fell 0.8 percent from a year earlier after a drop of 0.3 percent in September, the European Central Bank said today. On the month, loans slipped 0.2 percent. M3 money-supply growth, which the ECB uses as a gauge of future inflation, slowed to 0.3 percent in October, the lowest rate since records began in 1981, from 1.8 percent in September.

The economy of the 16-nation euro region resumed expansion in the third quarter after global trade boosted exports and government stimulus measures fueled domestic consumption. Still, growth is likely to remain muted unless credit flows improve and companies and households increase spending. The ECB has cut its benchmark interest rate to a record low of 1 percent and is flooding banks with cash in an effort to revive lending.

“The euro-zone recovery could be held back by a significant number of companies being unable to get the credit that they need,” said Howard Archer, chief economist at IHS Global Insight in London. Today’s data point to “very muted inflationary pressures” and “support the case for the ECB to only very gradually withdraw its emergency liquidity measures and to keep interest rates down at 1 percent until deep into 2010,” he said.

Weak Banks

While an ECB survey last month showed European banks expect to ease credit standards for companies in the fourth quarter after tightening them less aggressively in the third, it may take up to three years for lending to return to pre-crisis levels, according to Daiwa Securities SMBC Europe Ltd.

In Germany, Europe’s largest economy, banks may have to write off another 90 billion euros ($136 billion) on bad loans and securitization instruments, the Bundesbank said yesterday.

The world’s largest financial-services companies have racked up more than $1.7 trillion of losses and write-downs since the start of the financial crisis, according to Bloomberg data.

The euro-area economy will expand 0.7 percent in 2010 and 1.5 percent in 2011, after contracting 4 percent this year, the European Commission said on Nov. 3.

M1 Growth Slows

M1, which captures the most liquid form of money in the economy such as cash and overnight deposits, grew 11.8 percent in October from a year earlier, the ECB said, down from an annual increase of 12.8 percent in September.

The ECB has said it will “gradually” withdraw the additional liquidity it has pumped into the banking system as financial markets normalize and the economy strengthens. It has already signaled it is unlikely to offer banks 12-month loans next year after its third tender in December.

Economists don’t expect the ECB to raise interest rates until the third quarter of next year, a Bloomberg survey shows.

“From the real economy side, there’s no single reason why they should hike interest rates or even think about hiking interest rates,” said Carsten Brzeski, senior economist at ING Group in Brussels. “Economic growth is still too fragile.”

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