Newspaper article International Herald Tribune

Bank Loans Becoming Harder to Get in Euro Zone ; Drying Up of Lending Adds to Risk of Deep Recession, Analysts Warn

Newspaper article International Herald Tribune

Bank Loans Becoming Harder to Get in Euro Zone ; Drying Up of Lending Adds to Risk of Deep Recession, Analysts Warn

Article excerpt

The figures raise condern that Europe is on the verge of a credit crunch that would cause a deeper recession than had been expected.

Banks in the euro area cut lending sharply at the end of 2011, according to data published Wednesday, raising concern that Europe was on the verge of a credit crunch that could cause a deeper recession than had been expected.

A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more strict about whom they lend to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.

The survey, which covered the last three months of 2011, provided more evidence of the toxic effect that the sovereign debt crisis was having on the banking system. It also somewhat vindicates the E.C.B. policy of providing big emergency loans to euro area banks in an attempt to stave off a full-blown lending drought.

"A credit crunch would tip the euro zone back into a severe recession," Marie Diron, an economist who advises the consulting firm Ernst & Young, said in a statement.

There is also evidence that the problems in Western Europe are spilling over into the developing economies of Eastern Europe.

For example, lending to Poland from outside the country fell by $12 billion, the Bank for International Settlements in Basel, Switzerland, reported last week. The decline is surprising because Poland's economy continues to grow briskly. It suggests that hard- pressed West European banks have started withholding resources from their subsidiaries in Eastern Europe.

"It is obvious that we see a deleveraging, a retrenching process unfolding," Thomas Mirow, the president of the European Bank for Reconstruction and Development, said during an interview last week. He said the figures from the B.I.S. showed "this is not just perception but reality." The E.B.R.D. provides credit to support the development of free markets in the former Soviet bloc.

In December the E.C.B. radically expanded lending to euro area banks, providing EUR 489 billion, or $644 billion, at 1 percent interest for three years. …

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