Europe wary of credit crunch

FEARS of an emerging credit crunch in the eurozone increased yesterday as data showed a sharp slowdown in bank lending to the private sector, despite recent unprecedented injections of liquidity.

The European Central Bank calculated in regular monthly data that growth in loans to the private sector slowed substantially to just 1.0 per cent in December from 1.7 per cent in November.

Last month, in a series of special liquidity measures precisely to avert a credit crunch in the 17 countries that share the euro, the ECB launched its longest-ever liquidity operations, lending eurozone banks as much as they wanted for a period of three years at super-cheap rates.

And banks in the region queued up in their hundreds to borrow nearly half a trillion euros in the first-ever such operation.

Nevertheless, there have been concerns that banks are simply hoarding the cash, rather than lending it to businesses and households as the ECB hoped they would, and banks are parking record amounts of cash in the central bank's overnight storage facility.

In normal times, banks shy away from depositing cash at the ECB, preferring to lend any overnight surplus to other banks, where they win a higher return.

But the eurozone debt crisis has spawned a lack of trust between banks and institutions are opting to store the money at the ultra-safe ECB rather than lending it to their peers.

AFP