By James Saft
(Reuters) – Europe looks to be entering a credit crunch, with loans harder to get and those that are made coming on tougher terms.
Strikingly, banks are being tight despite falling demand for credit, pointing to a nasty interaction between the economy, its banking system and the choices of wary and indebted households and companies.
That this is all happening despite the massive efforts of the European Central Bank, which twice recently has made extraordinary amounts of nearly free money available to the banks, tells the grimmest tale of all.
As for the future, European banks still have hundreds of billions of capital to raise, implying that even when demand for credit returns, the unbalanced recession in the euro zone might be extended by continued tough loan market conditions.
Bank lending to euro-area companies in the real economy fell again in March, declining by 5 billion euros, an increase on February’s 2-billion-euro contraction, according to data released by the ECB on Monday. Banks instead took some of the inexpensive 3-year money they accessed from the ECB and increased their loans to governments by 29 billion.