ECONOMIC pain in the Eurozone is set to be heightened by a collapse in bank lending, according to an ominous report released this morning by Ernst & Young.
The audit firm estimates that bank lending this year will have fallen twice as fast as during the aftermath of the financial crisis, with under-pressure peripheral countries enduring the most severe drops.
Overall lending will dip two per cent in 2012, the report calculates, with loans to households down by 6.6 per cent and loans to non-financial corporates declining by a more modest 1.9 per cent.
“Tight credit conditions will be felt more acutely in the periphery: lending is forecast to decline by 8.8 per cent this year in Spain and by 4.5 per cent in Italy, while in Germany lending will expand by 1.3 per cent,” E&Y said.
While the economic environment is contributing to the credit freeze, the post-crisis increase in red tape is also affecting lending. Banks are having “to navigate through the raft of new regulations and legislation which are designed to avoid a repeat of 2008,” the report says.
Andy Baldwin from Ernst & Young adds: “In response to market conditions and regulation, banks are beginning to retreat behind national borders which is fragmenting the Eurozone financial system… Policy-makers need to be mindful of the rising cost of regulatory compliance and its macro-economic side effects.”