Tuesday 30 June 2009

3rd UPDATE: Euro Zone M3 Growth At 12-Yr Low As Credit Slows

3rd UPDATE: Euro Zone M3 Growth At 12-Yr Low As Credit Slows

(Adds analyst comment, further background.)

By Geoffrey T. Smith

FRANKFURT (Dow Jones)--Europe's recession continued to paralyze its banks in May, as their aversion to lend caused money supply growth to fall to its lowest rate since the creation of the single currency.

Growth in loans to the private sector slowed to 1.8%, from 2.4% in the year through April, according to data published Tuesday by the European Central Bank.

Despite an acceleration in borrowing by governments, overall credit growth in the 16-country area fell to 4.0% from 4.4% in April. Only lending to the area's governments accelerated, reflecting the widening budget deficits being used to soften the impact of the downturn. Annual growth in lending to governments quickened to 8.3% year-on-year, from 8.0% a month earlier.

The headline growth in M3 money supply in the euro area slowed much more than analysts had expected, to 3.7% in May from 4.9% in April. This is the slowest rate of growth since 1997, when the euro zone's prospective members were desperately squeezing their budgets in order to meet the Maastricht Treaty's criteria for adopting the single currency.

Analysts polled ahead of the release by Dow Jones Newswires had predicted a slowdown to only 4.4%.

The annualized rate of growth over the last three months - a measure which smoothes out some shorter-term fluctuations - also fell to 4.5% from 5.2% in the February-April period, confirming the trend.

"The data reflect two ongoing factors: tight bank lending standards and the general apathy for credit from the private sector," said Guillaume Menuet, senior European economist with Bank of America Securities-Merrill Lynch in London.

The narrower M1 money supply measure, which consists of cash in circulation and sight deposits, grew by a more robust 7.9% in the year through May, but that too represented a slowdown from April's 8.4%.

"M1 is the bright spot," Menuet said. "As one of the most forward-looking indicators, its more substantial growth clearly shows that the euro zone economy will start to rebound in the second half of the year."

Menuet and his team predict the euro area's gross domestic product will grow 0.2% in the third quarter and 0.3% in the fourth quarter of this year.

The near-term picture, however, remains a depressed one. The figures extend a long downward trend in monetary growth, reflecting the increased reluctance or inability of banks in the euro area to find profitable and reliable opportunities for lending. M3 money supply grew by 7.5% in 2008, but had already started to slow sharply in the fourth quarter of last year, and its growth has slowed in every month of 2009 so far. It is now below the reference value of 4.5% that the ECB set as its benchmark for this year.

Overall lending to households even turned negative in year-on-year terms in May, contracting by 0.2%. Consumer loans fell 0.6% and loans for house purchases fell by 0.5% from a year earlier. Miscellaneous other loans to households grew 1.8%

It is against the background of this trend that the ECB injected EUR442.3 billion into the money market last week for a record duration of 12 months, hoping to give banks enough certainty in the short- to medium-term to resume lending to one another and to the real economy.

The ECB's data indicate that the banks have so far failed to mobilize most of those funds, hoarding over EUR242 billion in the ECB's own deposit facility as of Monday.

-By Geoffrey T. Smith, Dow Jones Newswires; (+49 69) 29725-520; geoffrey.smith@dowjones.com

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(END) Dow Jones Newswires

June 30, 2009 07:20 ET (11:20 GMT)

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