The ECB came to the fore, the European Union must now follow

By CaixaBank research department | On 2 August, the Governing Council of the European Central Bank (ECB) marked a turning point in this institution's desire to intervene in the sovereign debt crisis. The ECB is concerned by the distortions in the price of debt for some countries whose risk premia partly reflect their possible withdrawal from the euro and make it difficult for monetary policy to work.

In this respect, it has shown itself prepared to adopt extraordinary measures to maintain unity for the single currency, although its actions depend on the countries in question requesting aid from the European funds (EFSF/ESM) and accepting the associated conditions.

The tensions in some sovereign debt markets and the adjustment of banks' balance sheets have affected the financing terms of non-financial sectors. However, Eurosystem intervention to relieve these tensions has meant that access to credit has not been drastically limited for the euro area as a whole. In particular, credit to non-financial firms posted a fall of 0.3% year-on-year in June for the euro area. Credit to households continued to slow down in June, growing by just 1.1% year-on-year.

The findings of the survey on bank loans for the second quarter of 2012 show even tougher criteria are being applied by financial institutions to approve loans to firms and households. This trend was less favourable than expected in the survey carried out three months ago, possibly due to high uncertainty and the decline in economic activity of the euro area.

At the same time, there was also a significant fall in demand for credit by non-financial sectors, although at a slower pace than in the first quarter. According to the financial institutions surveyed, this fall in demand for credit by firms was mainly due to a reduction in fixed capital investment. In the coming quarters, demand factors are expected to continue the squeeze on credit to firms and households.

Loans to firms and households saw a reduction in interest rates in the first half of 2012 for the euro area as a whole. The interest rate for loans to non-financial firms went from 3.0% at the end of 2011 to 2.6% in June. However, this trend in interest rates is largely due to the reduction in the reference rates after the ECB lowered the official interest rates by 25 basis points in July.

If we look at the spread between interest rates for loans and money market rates, we can see that the latter have risen significantly during the first half of 2012. For example, the spread for loans to non-financial firms has gone from 1.5% at the end of 2011 to 2.1% in June.

It should be noted that the trend in credit conditions is highly disparate depending on the country in question. In particular, those countries most affected by the sovereign debt crisis have seen a sharper squeeze on credit and much tougher conditions to obtain a loan. These differences have reached such an extent that the ECB has indicated the need for extraordinary monetary policy measures in order to even out financial conditions within the euro area. But the ECB cannot get rid of these tensions on its own.

For these to disappear once and for all, more progress needs to be made with sorting out national accounts, structural reforms and the construction of European institutions. Only then can the euro be sure to survive.

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