Eurozone Weekly Economic Briefing: 04 May 2012

The latest Bank Lending Survey reported a continued tightening of credit conditions in the Eurozone, but at a much slower pace. This is the first survey that takes into account the entire €1 trillion of funds injected by the ECB via its Long-Term Refinancing Operations (LTRO), suggesting that these have had the desired ‘bazooka' effect. However, for the real economy to benefit, the improvement in credit supply needs to be accompanied by an increase in credit demand. Unfortunately the survey reported a sharp fall in net demand for loans to NFCs and households. This is consistent with the wider economy and, though banks expect demand for corporate loans to rise in the coming months, ongoing troubles in the Eurozone suggest otherwise. In our view, despite the success of the LTRO, risks to the stability of the Eurozone remain significant and European policymakers should have contingency plans in place in the event that the crisis escalates. The ECB also released the results of its biannual survey on the availability of finance to small- and medium-sized enterprises (SMEs) in the Eurozone. The survey concluded that the financial situation of large firms is clearly more favourable than SMEs. With SMEs accounting for two-thirds of overall employment in Europe, these results are very discouraging and highlight the challenges that lie ahead for the Eurozone economy.