Eurozone banks tighten lending on virus jitters

Eurozone banks tightened their requirements for handing out loans in the 3rd quarter, a European Central Bank (ECB) survey showed on Tuesday, October 27, indicating nervousness over the region’s recovery as coronavirus infections spike. 

Credit standards – the yardstick that banks use to approve loans to companies and consumers – got stricter in the 3 months to the end of September, as institutions cited the “deterioration of the economic outlook and worsened creditworthiness of consumers affected by the pandemic.”

A net figure of 19% of banks toughened their criteria in the quarter, compared with 1% of banks in the previous 3 months. 

Credit conditions tightened for firms and consumers in Spain particularly, where restrictions on travel hit the key tourism and services industry hard, while Germany and France also saw heightened constraints on lending.

An upswing in economic sentiment after pandemic-induced lockdowns in the spring has faded after businesses opened up over the summer months, with countries across the 19-nation single currency club now reintroducing restrictions to curb a second wave of the virus. 

Demand for loans also fell from all-time highs in the 3rd quarter as firms needed less emergency liquidity compared with earlier in the year. 

The survey comes ahead of a key ECB meeting on Thursday, October 29, when the Frankfurt-based institution is expected to hint at more monetary stimulus to come to shore up the eurozone economy.

The ECB has already taken unprecedented action to counter the pandemic fallout, rolling out a 1.35-trillion-euro emergency bond-buying program to keep borrowing costs low and encourage lending.

Banks expect credit standards to continue to tighten in the 4th quarter, “reflecting concerns around the economic recovery…as well as uncertainties around the prolongation of fiscal support measures,” the central bank said.

ECB President Christine Lagarde has urged eurozone governments not to pull away fiscal support too quickly – including furlough or short-time work schemes – so as to prevent a “cliff effect.” – Rappler.com