STOCK MARKET WATCH - Friday, 3 February 2012

[Demeter]

23. Survey of Banks Shows a Sharp Cut in Lending in Europe By JACK EWING

http://www.nytimes.com/2012/02/02/business/global/european-banks-cut-lending-sharply-at-end-of-2011-ecb-data-show.html?_r=2&partner=rss&emc=rss

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 crisis that could lead to a deeper recession than expected...A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent 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 harmful effect that the sovereign debt crisis was having on the banking system. It also somewhat validated the European Central Bank 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 in an interview last week. He said the figures from the Bank for International Settlements showed “this is not just perception but reality.” The reconstruction bank provides credit to support the development of free markets in the former Soviet bloc.

In December, the European Central Bank radically expanded lending to euro area banks, providing 489 billion euros ($643 billion) at 1 percent interest for three years. Previously, the central bank offered loans for no more than about a year. That infusion of cash has been credited with easing the strain of the sovereign debt crisis. It will offer another round of three-year loans at the end of this month, a move that analysts expect to further guard against a credit crisis. Still, some warned that the situation remained perilous.

“For the sovereign crisis to truly abate, we need to see that governments are able to deliver austerity, and the economies can still grow in the face of it,” Karen Ward, senior global economist at HSBC, wrote in a note to clients. It would be wrong to assume that the central bank lending was “a panacea for the euro zone sovereign crisis,” she wrote...MORE

DRAINING THE LIFEBLOOD OUT OF THE ECONOMY TO KEEP THE EURO AFLOAT...