Euro zone banks tighten credit access amid pandemic worries

Reuters | Frankfurt

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Banks in the euro zone curtailed access to corporate credit in the third quarter and expect to tighten further as they grow increasingly worried about a fresh wave of the coronavirus pandemic, a European Central Bank survey showed on Tuesday.

With governments once again restricting activity, banks are worried about rising credit risk. The pandemic is challenging expectations for a relatively swift rebound and may test government commitments to maintain credit guarantees.

Tighter credit access could also weigh on growth in the 19-country euro area, which in turn could lead the ECB to provide more stimulus to keep companies liquid until restrictions are lifted, possibly next year when a vaccine may be deployed.

“For the fourth quarter of 2020, banks expect credit standards to continue to tighten for firms, reflecting concerns around the economic recovery as some sectors remain vulnerable, as well as uncertainties around the prolongation of fiscal support measures,” the ECB said in a statement.

Banks were already curtailing access in the third quarter, demanding better collateral and selling loans with higher margins, the ECB said.

The restrictions are not yet showing up in demand, however, suggesting that companies will accept tougher terms in exchange for the cash.

Lending to non-financial companies expanded by 7.1% in September, unchanged since June and not far below a more than ten-year high of 7.3% hit in May.

But banks expect corporate credit demand to moderate in the last three months of the year with more interest coming from small and medium-size firms rather than large companies, the ECB added.

“Are we heading into a credit crunch? In some sectors and for some companies,” ING economist Carsten Brzeski said. “This will be the challenge for the ECB and for governments. It’s hard to tailor (ECB loan facilities) for hotels, restaurants and airlines.”

Although tighter credit access is likely to worry ECB policymakers, the deterioration is not yet considered serious enough to prompt more stimulus when the ECB meets on Thursday, especially since the bank has plenty of untapped firepower at its disposal.

Still, most ECB watchers foresee the bank expanding its stimulus measures in December, when new economic projections are expected to show a slower rebound and could even hint at a risk of a double-dip recession.