Has the credit crisis returned to Europe

NEW YORK: The credit crisis, which made it difficult if not impossible for companies and individuals to borrow during the worldwide recession, appears to have returned to Europe.

In the euro area as a whole, the amount of credit outstanding has fallen to levels lower than they were a year ago, according to figures released last week by the European Central Bank. In some countries within the eurozone, including Italy and Spain, credit is falling at a faster rate now than it did during the first crisis.

The difficulty in obtaining credit seems likely to make it even harder for the countries that have been hurt the most to recover and begin to grow again. While the ECB has relieved the immediate financial pressures on both governments and banks by making it easy for them to borrow, it has not managed to extend that easy credit to those who need money the most.

In the middle of the last decade, loans were growing rapidly in many countries. Interest rates had fallen sharply as markets concluded there was no good reason for rates to be much higher in one eurozone country than another. After all, the currency risk was identical in all the countries.

In Ireland and Spain, the easy credit helped to finance large housing bubbles, which then burst during the crisis. In both of those countries, the amount of outstanding loans rose at a pace above 30 percent a year at the peak of the cycle.

A falling total of loans means that on a net basis, no new loans are being issued, although banks might be relending some of the money being repaid on old loans. In some cases, particularly in Ireland, the amount of loans outstanding has plunged not because loans are being repaid but because they are being written off.

Some countries seem unaffected. In Finland, which has been among the most vocal in demanding austerity in the troubled countries, the amount of loans outstanding continues to grow at a rate of more than 5 percent a year. In Austria and Germany, loan volume is also rising, although at a slower rate.

But in Portugal, the amount of corporate loans outstanding is now lower than it was in spring 2008, before the collapse of Lehman Brothers sent world credit markets tumbling. In Ireland, loan totals to both companies and households have fallen to 2005 levels.

Reference: http://economictimes.indiatimes.com