Lending to euro zone households and companies contracted for the 28th month in a row in August, though at a slower pace, putting a keener spotlight on European Central Bank (ECB) efforts to get credit flowing again.

Euro zone banks, particularly in the crisis-stricken countries, have tightened up on lending as they adapt to tougher capital requirements and undergo health checks, while companies are holding back on investments, unsure of the future, said a report in the Gulf Daily News (GDN), our sister publication.

The euro zone economy ground to a halt in the second quarter and with inflation in what ECB president Mario Draghi has called the 'danger zone' below one percent for almost a year now, the ECB saw the need to add new stimulus steps in June and September.

The ECB has now started to offer banks four-year loans at ultra-cheap rates and plans to buy asset-backed securities and covered bonds from October to lighten the weight on banks' balance sheets and entice them to lend.

But economists are sceptical about whether the plan will work, saying bank lending to private euro zone businesses needed to grow at a three per cent annual rate on a sustained basis to stir inflation.

August lending rates are nowhere near such levels.

In August, loans to the private sector continued to fall, down 1.5 per cent from the same month a year earlier after a contraction of 1.6 per cent in July, ECB data showed yesterday. Private sector loans have not grown since April 2012.

“It remains questionable as to how much all the liquidity measures announced by the ECB will encourage banks to lift their lending,” IHS Global Insight economist Howard Archer said.

“…it is also questionable how much businesses' demand for credit will pick up while the economic and political outlook looks so uncertain,” he said.

Draghi told Lithuanian business daily Verslo Zinios in an interview published yesterday a continued weakness in credit growth was likely to curb the euro zone recovery.

Euro zone companies rely mainly on bank funding rather than capital markets, which is why it is so crucial to fix lingering problems in the sector.

For that purpose, the ECB is putting the bloc's top banks through a thorough review of their balance sheets to weed out bad loans, update collateral valuations and adjust capital.

The picture varies across the euro zone. While lending to companies in Ireland fell at an annual rate of 11.8 per cent in August  - the fastest decline in three years '“ and 8.8pc in Spain, it rose in Finland, Germany and France.

Euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of two per cent in August, up from 1.8 per cent in July.

Draghi expects the euro zone to grow modestly in the second half of the year, helped by the ECB's recent stimulus steps, and has pledged to do more should it become necessary.

He said there was a risk that insufficient structural reforms could weigh on the euro zone's business environment.

“According to the preliminary information received over the summer, economic conditions have been somewhat weaker than expected,” Draghi was quoted as saying.

“Overall, however, we expect modest growth in the second half of the year.” - TradeArabia News Service