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Eurozone bank lending, sentiment fall again, pressuring ECB

Frankfurt City FeatureFrankfurt City Feature

Another raft of overwhelmingly negative economic data hit the Eurozone Thursday, with bank lending to the private sector falling again in July, along with a broad survey of business and consumer confidence.

On a busy day for bean-counters, Italy, the bloc’s third-largest economy, said retail sales fell by 2.6% in the year to June, more than expected, while Spain said its inflation rate fell to -0.5% in July, adding to the European Central Bank’s headaches about the Eurozone possibly falling into a deflationary spiral.

Even Germany, the region’s strongest economy, couldn’t break the pattern, as the number of jobless rose by 2,000 in August, in contrast to expectations for a 5,000 decline.

The largely negative tone of the releases drove the euro down to within touching distance of $1.3170, its low for the year against the dollar.

On balance, the figures add support for fresh action from the ECB and Eurozone governments to support the economy, but markets have already bet heavily on such stimulus this week. The German stockmarket’s benchmark DAX index fell 1.5% and France’s CAC 40 fell 0.9%.

Bond markets, however, did push higher, driving yields lower, but rather than reflecting the hope of large-scale bond-buying by the ECB, that was more a response to alarming reports of Russian incursions into Ukraine. Yields on Germany’s 10-year government bond fell to a new record low of 0.87%, while Italy managed to sell new 10-year bonds at a record-low yield of 2.39%.

Expectations of ECB action when its policy-making council meets next week have mounted steadily as the threat of a triple-dip recession and the risk of deflation have increased. The ECB said Wednesday it had hired Blackrock to advise it on its new plans for buying asset-backed securities. Analysts took that to mean that, after months of waffling about it, the ECB is actually close to launching what would be a form of quantitative easing–albeit not in the scale seen in the U.S., U.K. and Japan.

The ECB’s problems with Eurozone banks were on full view again Thursday as new data showed lending to the private-sector continued to fall in July, by 1.6% in year-on-year terms. The lending data were remarkable for particularly strong falls in bailout recipients Spain, Portugal, Ireland and Greece, where preparations for the ECB’s asset quality review and stress test are putting exceptional pressure on banks to clean up their balance sheets.

Admittedly, the rate improved for a second straight month, and growth in both narrow (M1) and broad (M3) money supply, which economists see as a reasonably reliable indicator of economic activity, accelerated again.

But the European Commission’s Economic Sentiment Index, a composite survey of businesses and households that also has a good record of tracking activity, fell in August to 100.6 from 102.1 in July.

European Commissioner Jyrki Katainen said the drop “is a source of concern: without confidence, we will not see the pick-up in investment we need for a more robust recovery in growth and employment.”