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Frankfurt - The eurozone avoided a credit crunch in January
but banks showed scant sign of lending on the funds they snapped up at the
European Central Bank’s (ECB's) first three-year lending operation to companies which have
been starved of investment funds.
The monthly flow of loans to firms stabilised in January,
declining by just €1bn after falling €35bn in December - the fastest drop on
record - ECB data showed on Monday.
The flow of loans to households turned positive and the
figures showed some of the cash flowed into peripheral eurozone government
bonds, which have seen yields fall markedly.
The money supply data had been eagerly awaited as they gave
a glimpse of how bank lending activity responded to the ECB’s first three-year
funding operation - or LTRO - late last year, which flooded the financial
system with €489bn of ultra cheap cash.
“The positive psychological impact on markets and,
particularly, government bond markets has been obvious from the start,” ING
economist Carsten Brzeski said of the ECB operation.
“The economic impact, however, remains still limited. As a
consequence, this week’s second three-year LTRO is clearly not redundant,” he said.
ECB president Mario Draghi has said the bank’s move avoided
a “major, major credit crunch”, comments that Monday’s data support. The
central bank will offer banks the chance to grab another tranche of the
ultra cheap, three-year money on Wednesday.
The median expectation in a Reuters poll of 60 economists
showed that the ECB will allot €492bn at 1%.
Forecasts ranged from €200bn to €1 trillion.
It remains to be seen whether the second injection of ECB three-year loans will open up lending channels to companies again.
So far, banks have used most of the cash they took in the
ECB’s first dose of funds to plug holes in their own balance sheets and to buy
government bonds, which has helped bring down Spain’s and Italy’s borrowing
costs.
The ECB data showed that Spanish as well as Italian banks
increased their monthly net purchases of government bonds by record amounts in
January.
Spanish banks increased their holdings of securities issued
by eurozone governments by a record €23.1bn, bringing the total they held in
January to €229.6bn.
The data do not break down banks’ holdings by issuing
country but the presumption is that they focused on domestic debt.
In Italy, the monthly rise in the value of government debt
holdings was €20.6bn month, also a record monthly increase, increasing the
total to €280bn.
Italy’s six-month borrowing costs sank towards 1% at auction
on Monday as it sold €12.25bn in short-term bills, meeting solid demand ahead
of the latest ECB cash offer.
“I suspect this is market positioning in anticipation of a
relatively significant LTRO take-up, the proceeds of which will then be parked
in the front end of the Italian curve,” said Rabobank strategist Richard
McGuire.
Modest expansion
Overall money growth in the currency bloc also pointed to
slow a recovery in the tight credit conditions at the end of last year, which
led the ECB to embark on the three-year funding operations.
Eurozone M3 money supply - a more general measure of cash in
the economy - grew at an annual 2.5% in January, picking up from 1.5% in
December and smashing expectations of analysts polled by Reuters of a 1.8%
increase.
The three-month moving average of M3 growth was flat at
2.0%, remaining well below the ECB’s reference rate of 4.5%, above which the
bank sees dangers to medium-term price stability.
“This shows that we are avoiding an outright contraction in money growth, but these are still very weak levels indicating modest expansion of credit in the eurozone, and that’s fully in line with what we’d expect after the severe credit crunch at the end of last year,” said Andres Matzen, analyst at Nordea.
