Lending Still Weak In Slack Eurozone Economy

DAVID McHUGH

FRANKFURT, German (AP) â¿¿ Another drop in lending to companies in the 17-country eurozone showed the economic downturn is deepening, as a brighter mood on financial markets fails to catch on with businesses.

The European Central Bank said Thursday that loans to non-bank businesses shrank 1.4 percent year on year in September, double the 0.7 percent contraction reported the month before.

The numbers show the economy is struggling despite efforts by the central bank to stimulate credit and calm financial markets fearful that the eurozone might break up. The ECB has cut its main interest rate to a record low 0.75 percent and made ⿬1 trillion ($1.3 trillion) in cheap loans to banks that don't have to be paid back for three years.

Even so, that easy money is not making it from banks to businesses and consumers, largely because demand for credit remains weak.

Businesses see no reason to borrow to invest in expanding production. Meanwhile, banks in some countries have less to lend because they are struggling to recover from losses on real estate loans that didn't get paid back and on government bonds that have fallen in value due to fears about those governments' finances.

The eurozone economy shrank 0.2 percent in the second quarter after zero growth in the first quarter, and the outlook for the rest of the year remains poor. A drop in output in the third-quarter â¿¿ for which numbers are due Nov. 15 â¿¿ would put the eurozone in a technical recession, defined as two consecutive quarters of contraction.

The ECB's loan report "is disappointing news and consistent with our view that the eurozone economy is still in a mild recession," said Marie Diron, economic adviser to Ernst & Young.

"Much of the fall in loans is probably accounted for by companies preferring to preserve cash or repay debt rather than banks tightening credit conditions even further," she said.

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