Eurozone banks to ease business loan standards in second quarter

Eurozone banks expect to ease standards for business loans and consumer credit as competition remains fierce and demand slows in Italy and Spain, a European Central Bank (ECB) survey showed on Tuesday.

With economic growth slowing and recession fears rising, ECB policymakers recently approved a new set of ultra-cheap loans to commercial banks, fearing they would halt the flow of credit, exacerbating the downturn.

But the results of the survey suggest that banks are not planning to make it any harder for businesses to get loans, blaming high competitive pressure.

“For the second quarter of 2019, banks expect an easing of credit standards for loans to enterprises and consumer credit, and a further tightening of credit standards for housing loans,” the ECB said.

But credit demand cooled among consumers and companies in Spain, where general elections will be held this month, and from businesses in recession-struck Italy.

For the euro area as a whole, banks expect net demand for housing loans, consumer credit and business loans to rise in the three months to June.

Credit standards − banks’ internal guidelines or loan approval criteria − and terms and conditions on new credit remained broadly unchanged, the survey showed.

Italian banks, however, said they were tightening lending terms for a second straight quarter, blaming a higher cost of funding and a heightened perception of risk.

Borrowing costs for the Italian government, which drive the cost of funding for banks, have risen since a populist coalition took power last year and disclosed plans to run higher budget deficits.

Meanwhile the government bond yields in the euro area were a touch lower on Tuesday, with concern about US/European trade tensions providing some support to safe-haven debt markets a day ahead of a European Central Bank meeting.

The US Trade Representative on Monday proposed a list of European Union products ranging from large commercial aircraft and parts to dairy products and wine on which to slap tariffs as retaliation for European aircraft subsidies.

European stocks markets opened broadly lower, feeding through to some support for regional bond markets. Analysts said there was also some focus on the International Monetary Fund, which publishes its half-yearly World Economic Outlook later this session.

“For today, there are two factors that might play a role − the IMF’s update on the world economic outlook which may see some pessimism,” said KBC rate strategist Mathias van der Jeugt.

“Overnight, we’ve also had news the US is pondering tariffs on EU goods which is a potential surprise and could hurt risk sentiment.”

Germany’s benchmark 10-year bond yield hovered just below zero per cent in early Tuesday trade, but is up 9 basis points from 2-1/2 year lows of minus 0.09 per cent hit last month.

Most other long-dated bond yields in the currency bloc were also a touch lower on the day.

Overall trade was expected to be subdued ahead of Wednesday’s European Central Bank meeting.

This month’s ECB meeting takes place against a backdrop of speculation about whether the central bank will in coming months adopt tiered interest rates to alleviate pressure on the banking sector from negative interest rates.

ECB policymakers debated the risk that ultra-low interest rates pose to banks at their March meeting, minutes released last week showed.

On Monday, German bank lobby group BdB urged the ECB to lower the charge that banks pay on some of their excess cash by introducing a tiered deposit rate.

While the ECB is likely to face questions about tiered rates and its plan to launch a fresh round of cheap multi-year loans for banks, analysts said details were likely to come later on. “The next big meeting is June, so I’m not holding my breath about new details this week,” said Frederik Ducrozet, global macro strategist at Pictet Wealth Management in Geneva.

Policymakers looking to persuade Germany and other wealthy eurozone countries to pool their debt with less well-off neighbours may need to keep things short and simple.

A persistent shortage of triple-A rated bonds has kept momentum for a pooled eurozone sovereign bond alive despite opposition from Germany. The euro zone’s largest economy has so far rejected any proposal that could potentially leave its taxpayers on the hook for the debts of other countries.

Plans for a synthetic common bond, comprised of debt from the 19 eurozone countries, have stalled since they were first unveiled by the European Commission (EC) last year, prompting officials to look at other options, including short-term euro bills.

Reuters