Banks plan to cut back on the flow of credit to eurozone businesses this summer because they anticipate that governments will wind down their loan guarantee schemes, according to a European Central Bank survey published on Tuesday.
Lenders told the ECB in its quarterly survey that they expected “a considerable net tightening of credit standards on loans to enterprises” in the third quarter of 2020. European governments have guaranteed hundreds of billions of euros in loans to struggling businesses since the coronavirus pandemic hit the continent’s economy, while central banks have flooded the banking system with ultra-cheap loans at negative rates to help boost the supply of credit. This fuelled demand for loans from eurozone businesses, which hit a record high in the second quarter, according to the survey. The disruption of the pandemic has caused “acute liquidity needs for inventories and working capital”, the ECB said. But in the coming months lending could dry up for companies that are relying on bank funding to cope with the economic fallout from the coronavirus pandemic, the ECB found — a scenario that could deal a fresh blow to jobs and growth in the second half of this year. Recommended Coronavirus: free to read Loosening lockdowns: tracking governments’ changing coronavirus responses | Free to read The Spanish central bank recently called on the government in Madrid to top up its €100bn loan guarantee scheme owing to fears that it could soon be exhausted. The chairman of a large eurozone bank told the Financial Times that some lenders had already begun to restrict access to credit in order to conserve capital as they positioned themselves for an ECB decision on whether to allow banks with stronger balance sheets to restart dividend payments. Jack Allen-Reynolds, economist at Capital Economics, said the anticipated tightening of banks’ corporate lending standards “might encourage those governments to extend their loan guarantees, perhaps until the end of the year”. He added that the planned pullback on bank lending was set to be “much more moderate” than the credit crunch during the 2008 financial crisis. Banks told the ECB that they had only slightly tightened their lending standards to businesses in the three months to June and the rejection rate for corporate customers seeking a loan fell by 12 per cent — underlining the role that state guarantees played in supporting the flow of credit. Demand for corporate loans was higher from small and medium-sized enterprises than for large companies and it was significantly stronger for short-term loans than for longer-term credit, while demand for loans to fund investment fell sharply. Recommended InterviewChristine Lagarde Christine Lagarde’s learning curve: ECB boss on ‘brutal’ coronavirus crisis Demand for mortgages also declined substantially in the second quarter, while demand for consumer credit and other household loans “reached a record low since the survey was launched in 2003”, the ECB said. Banks expect loan demand from businesses to grow more slowly in the third quarter, while the appetite for mortgages, consumer credit and other household lending is expected to rebound after the lockdowns imposed to contain the pandemic were lifted, according to the survey of 144 lenders that was conducted last month. The survey results combined with disappointing eurozone industrial production data for May to underline the fragile nature of Europe’s economic recovery from the widespread disruption of the pandemic that is expected to plunge the bloc into a record postwar recession. The record 12.4 per cent increase in eurozone industrial production in May was below the 15 per cent consensus forecasts of economists surveyed by Reuters, and output remained 20 per cent lower than last year’s level. Meanwhile, investors’ expectations of a rebound in the German economy in the next six months dipped in July, according to the latest ZEW sentiment survey — although their perception of the current conditions in Europe’s largest economy continued to improve.
