The Loan Lowdown: A Fresh Survey Spells 2008 Déjà Vu

The Loan Lowdown: A Fresh Survey Spells 2008 Déjà Vu
Stéphane Renevier, CFA

7 months ago1 min

The European Central Bank (ECB) surveys banks four times a year, asking about lending conditions and demand for loans from firms and households. And the most recent quarterly results signal that a credit crunch may have started in earnest.

Demand for loans took a nosedive in the first quarter of the year (bold blue line), falling by much more than banks anticipated (lighter blue line). That makes sense: folks and firms will have been put off borrowing by pumped-up interest rates (yellow bars) since they make it more expensive to pay back cash. Plus, they’re cutting back on the stuff they’d usually take out loans for, investing less in fixed investments (green bars) – that’s machinery and equipment, buildings, and technology, to name a few. That’s a big deal: loan demand dipped so low over the quarter that it's breaking records set during the 2008 global financial crisis.

And for those firms that are still looking to borrow, banks have made it "substantially" harder to secure that much-needed cash. Instead, the institutions are focused on covering themselves for stormy conditions and a spike in defaults. That might stress businesses even more, while reducing the amount of credit in the economy.

Now, inflationary pressures could ease up under even tighter financial conditions, which would take the heat off the ECB for more aggressive interest rate hikes. But still, a slowdown in growth might be lurking around the corner. Remember, credit fuels the economy – so when it sputters, the economy tends to follow suit. In other words, buckle up: we might be in for a bumpy ride.



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