Banks expect demand for credit to soar, but supply to fall by 5pc
THE credit squeeze is about to become a crunch as demand for business loans soars but banks tighten lending further, new eurozone figures suggest.
The survey on bank lending by the European Central Bank found that banks expect demand for credit to surge by almost 30pc in the current three months -- but the supply of credit is expected to fall by 5pc.
The survey of Irish banks shows they expect less dramatic developments in the present quarter, as economic recovery lags the central eurozone area, but that the squeeze will get tighter.
Irish banks foresee a rise in demand for home loans, but unchanged demand for credit from business. However, this is the first time since October 2007 that banks have not forecast a decline in business demand.
The fall in demand for business credit in the April-June period was the smallest in three years. It was also the first quarter in more than three years that Irish banks did not report a tightening of credit standards.
This suggests some tightening of the credit squeeze in the current three months, as some pick-up in demand for loans meets unchanged credit supply. However, banks in the euro area as a whole seem to be tightening credit more than in Ireland.
"It is likely that tight lending criteria will remain for some time, which will hamper growth in the eurozone in the next couple of years," said Marie Diron, senior economic adviser to accountants Ernst & Young.
"The results are worrying for companies, since the survey shows a larger proportion of banks tightening their credit standards than in the previous quarter.
"Despite large amounts of liquidity provided by the ECB, this is not finding its way to companies and households because the inter-bank market has been impacted by uncertainty about the health of various banks," she said.
The hope is that the data provided by the EU banking stress tests will reduce uncertainty and allow sound banks to borrow more easily on the inter-bank market. Irish banks reported that conditions in the market deteriorated during the quarter, after six months of improvements, as the sovereign debt crisis worsened.
They expected that things would get no better during the current quarter, although the survey was taken before the stress test results were published.
Credit standards were tightened on home loans, and demand continued to fall. As well as the much-publicised increases in mortgage rates, the average length of new loans fell. Rates charged to firms of all sizes also increased.