ECB Bank Lending: Tight Credit Conditions Persist, Spending Cuts Could Curve Recovery

The European Central Bank released its Bank Lending Survey, showing persistent tightening in lending and credit provided by banks to investments and household throughout the second quarter of this year.

Growth rate in the continent is stronger than expected, nonetheless, banks continue on tightening credit over the past three months of this year, affected by the sovereign debt crisis that hammered down the financial sector and forced various governments to slash and overhaul its budget and spending.

The statement released from the bank said that ''The downward trend in the net tightening of credit standards on loans to enterprises, which came to a halt in the first quarter of 2010, was reversed in the second quarter, increasing from 3 percent to 11 percent,' adding that 'Looking forward, euro-area banks anticipate credit standards on loans to enterprises to tighten somewhat in the third quarter.'

ECB added that 'The degree of net tightening of credit standards on loans to households for house purchase was unchanged at 10 percent, exceeding the 2 percent expected at the time of the previous survey round,' adding that 'Similarly, the degree of net tightening remained broadly unchanged for consumer credit, at 12 percent, compared with an expected 2 percent in the previous survey round.'

The region's growth rates were stronger than expected, but with debt concerns and government slashing spending and overhauling budgets, economic recovery for the Euro-Zone might falter.

ECB projections for this year's growth rate to near 1.0 percent, and to continue on expanding throughout the upcoming year by 1.2 percent. But the debt crisis in the region forced banks to tighten its lending, accordingly, bank's ability to borrow and fund loans to consumers might worsen over the third and fourth quarter of this year.

'Negative spillover effects from the sovereign debt crisis appear to have worsened banks' ability to obtain funding. Over the next three months, banks expect that the current difficulties in accessing wholesale funding will remain, although not to the same extent as observed in the second quarter of 2010,' ECB said.