Slow credit for consumers, so EIB will start lending
News Article Date: Thursday 11th of June 2009
European banks got billions of Euro in government bail-out monies, but they aren’t lending it to consumers, a sign that has caused so much worry that the European Investment Bank (EIB) said it will propose raising its loan facilities to European Union businesses by 10 billion Euro officials in Brussels said. As banks have kept the government money to recapitalise themselves, it has meant that consumers and businesses can’t get their hands on it to start spending and re-boot the stalled European economy in the worldwide recession. “Many perfectly viable small businesses are having difficulties in getting access to finance because of the banks’ current reluctance to lend,” said European Commission President Jose Manuel Barroso. The banks got the nearly-free money without any government restrictions on how it can be used and many so far have just refused to lend it and the EU has not said it would force them to do so and that led the EIB said that on June 9 it will recommend increasing its overall lending targets for the current year and the next, from 60 to 70 billion Euros, Barroso said after a meeting with EIB President Philippe Maystadt. Within this amount, the support available to SMEs is to be increased from 7.5 to 10 billion Euro annually. The EIB delivered loans totaling 57 billion Euro in 2008, of which 8.1 billion went to small and medium sized businesses (SMEs.) “This initiative will help those small businesses keep people in jobs,” Barroso said. The request is to be discussed by EU finance ministers at their next regular meeting, on June 9 in Luxembourg.
Founded in 1958 to provide long-term financing for projects aimed at bringing EU states closer together, the EIB is also providing seven billion Euro in credit to the EU’s troubled auto industry to develop climate-friendly cars. Maystadt told reporters that the increase was needed to meet higher demand for credit in light of the global credit crunch, with banks still busy recapitalidsing, using the government money to cover losses from being involved in the sub-prime mortgage market in which customers with poor credit ratings, pushed into adjustable rate mortgages they couldn’t afford, defaulted, leaving the banks to turn to governments to replace the money they lost by poor management and lending decisions. “If we get so many requests from companies in all sectors, this means that it is more difficult for them to get finance from their traditional banks,” the EIB president said, adding that, “Not only are we increasing the volume of lending ... we are also taking on more risks, by lending to companies that do not fully meet our usual criteria,” the same practices that caused the recession that has crippled Europe and the world, shuttering thousands of businesses and putting millions of people out of work. However, Maystadt played down concerns of possible defaults. “So far, we have not had any yet,” he said. The EIB has put a series of incentives in place to convince the private sector to take over its loans, for instance by raising interest rates after four years.
The economic problems are so vast that even economists can’t figure them out and the latest problem now isn’t credit problems or inflation, but deflation as Belgium joined Germany, Portugal, Ireland and Spain in posting a drop in consumer prices, highlighting concerns that the 16-member Eurozone may soon slide into deflation as a result of the global recession. Belgian consumer prices fell in May from April, by 0.37 percent, for the first time since December 1960. The drop was largely the result of a 17.7 percent fall in electricity, gas, heating fuel and petrol prices, Belgian media reported. Germany’s European harmonised index fell by 0.1 percent, the country’s statistical office said. Deflation has already hit Spain, Ireland and Portugal, three of the European countries most affected by the economic slowdown. Economists now expect average consumer prices in the 16-member Eurozone as a whole to fall in June, adding to the difficulties that the European Central Bank is experiencing as it tries to deal with Europe’s worst recession in decades. Deflation is generally defined as a decline in prices as a result of a severe contraction of economic activity.
In yet more evidence of the contradictory nature of the financial crisis, Germany’s consumer price index for May is expected to show zero percent inflation compared to the same month last year, for the first time since 1987, according to preliminary results from six federal German states, Germany’s Federal Statistical Office reported. May’s consumer price index dropped one percent compared to April 2009, which in turn represented an increase of 0.7 percent over April last year. The results were thought to be a consequence of the sharp rise in oil prices during the first half of 2008, which have since dropped off again, counteracting other inflationary factors. Analysts predict that inflation will sink to negative numbers during the course of the summer, before picking up again towards the end of the year. Final results for May are due to be released on June 10.
It’s not as bad as Spain, where double-digit unemployment is the worst in the EU, but Hungary’s unemployment averaged 9.9 percent in the February-April period, the worst figure since 1996, the country’s Central Statistical Office reported. In the same three-month period last year, the unemployment rate was only 7.7 percent. Statistics also revealed that only 55.1 percent of Hungarians between the age of 15 and 64 are actively employed. Hundreds of thousands in this age group have taken early retirement or live off invalidity benefits. Roughly 3.74 million of Hungary’s population of 10 million are employed, the figures show, down 84,500 on the same period last year. According to data published by the EU statistics agency Ecostat last summer, Hungary had the third-lowest rate of participation in the labour market in the 27-nation bloc, ahead of only Malta and Poland. Hungary’s Prime Minister Gordon Bajnai, as he took office last month, identified the low employment rate as Hungary’s single greatest barrier to growth. Bajnai said he wants to see 65 per cent of Hungarians of working age in jobs. In the United States, where the whole problem started with bad mortgage loans, a panel of top economists forecast an end to the country’s deep recession by late this year, a survey showed. The National Association of Business Economists (NABE,) which surveyed 45 economists, said the US economy had shown some signs of stabilising but would still recover more slowly than in past downturns. The panel still expected the US economy to contract 1.8 percent in the second quarter, after a massive 6.1 percent contraction in the first three months of the year. But the survey predicted growth of 1.2 percent in the second half of the year. “The good news is that the NABE panel expects economic growth to turn positive in the second half of this year, with the pace of job losses narrowing sharply over the remainder of this year and employment turning up in early 2010,” NABE’s President, Chris Varvares, said.
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