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Thursday March 29, 2012

Banks use ECB cash to buy bonds, lend less to companies

FRANKFURT: Banks cut lending to eurozone companies in February while those in Spain and Italy stocked up on government bonds, suggesting the flood of cash that the European Central Bank (ECB) has pumped out has yet to bolster flagging businesses in the wider economy.

The monthly flow of loans to non-financial firms fell by three billion euros (US$4bil) after rising by just one billion euros in January. The flow of loans to households was unchanged.

Eurozone M3 money supply a more general measure of cash in the economy grew at an annual 2.8% in February, accelerating from 2.5% in January. A Reuters poll had pointed to a reading of 2.4%.

The lending figures, released yesterday, were a blow to the ECB's efforts with its three-year funding operations or LTROs to unclog the banking system and encourage an increase in lending to companies, which have been starved of investment funds.

Global Insight economist Howard Archer said the drop in lending to firms and flat lending to households “fuel concern that the 489 billion euros loaned to European banks by the ECB in a three-year unlimited tender in December has not so far at least fed through to boost lending to the private sector”.

The ECB flooded the financial system with 489 billion euros of cheap three-year funds in the first of the twin operations late last year, adding a further 530 billion euros at the second operation on Feb 29.

The February lending data would not have shown the impact of the second big loan handout, Archer said.

“We no longer expect the ECB to cut interest rates further, although we actually believe that there is a decent case for the ECB to do so, given the ongoing very real possibility that the eurozone will suffer gross domestic product contraction in both the first and the second quarters of this year,” he said.

ECB president Mario Draghi is under pressure from a German-led group of ECB policymakers pushing for the bank to prepare an exit less than a month after it completed the second of the twin LTROs, which is dousing the eurozone crisis, at least temporarily. - Reuters

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