European Economy Remains Fragile, Data Shows

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The New York Times
Friday, January 04, 2013

European Economy Remains Fragile, Data Shows

By JACK EWING

FRANKFURT — Bank lending to companies in the euro zone continued to slump in November, according to official data published Thursday that could encourage expectations of an interest-rate cut by the European Central Bank as early as next week.

In its monthly report on lending, the central bank said Thursday that loans to companies, not including banks, in the 17-nation currency zone fell at an annual rate of 1.8 percent in November, the same rate of decline as in October.

That is a sign that measures by the bank have not yet succeeded in restoring the flow of credit to troubled countries like Spain. Credit is a prerequisite for economic growth, and the central bank closely watches data on lending in deciding the level of the official interest rate.

During the last year the central bank has gone to ever greater lengths to encourage lending. It has cut the benchmark interest rate to a record low of 0.75 percent and allowed banks effectively to borrow as much money as they want at that rate.

The central bank has also promised to buy the bonds of countries like Spain to hold down their borrowing costs, a policy intended to help businesses and consumers in the countries hardest hit by recession.

The interest rate that a government pays often acts as a floor on the market rates paid by the country’s companies and consumers.

But the central bank’s efforts have been thwarted by continued reluctance by banks, many of which are already burdened by bad loans and are trying to reduce risk. In some countries there may also be a lack of demand for loans, because corporate managers are not confident enough to resume investing in their businesses.

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