New Eurozone credit crunch as coming recession hits lending

Tim Wallace
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THE FAILURE of short-term quick fixes to rescue the Eurozone’s broken banks means lending levels will be slashed and balance sheets will shrink at a faster rate even than in the financial crisis, a report from Ernst and Young warns today.

The looming recession means non-performing loans will mount to record highs in 2013, while the insurance and investment industries will continue to struggle with very low returns.

Ernst and Young cut its GDP growth forecasts further – it now believes the economy will contract by 0.6 per cent this year, deeper than the 0.5 per cent fall forecast in March, and 0.4 per cent in 2013, down from growth of 0.9 per cent predicted just a few months ago.

As a result, non-performing loans will mount to 6.2 per cent this year and peak at 6.5 per cent in 2013, while balance sheets are set to shrink by €1.6 trillion (£1.29 trillion) in 2012, as banks dispose of non-core assets and cut back lending activity.

Corporate loans will contract by 4.8 per cent this year and consumer loans by 6.6 per cent, both record declines for the Eurozone.

“This will have a significant impact on the wider Eurozone economy; it represents a sharper shrinking of balance sheets than during the 2008/09 financial crisis,” said economic adviser Marie Diron.

“It is in part reflective of lower demand for loans but it will exacerbate the current credit shortages larger firms will be able to draw down their cash balances or access alternative sources of funding, but smaller firms will struggle to access funding.”

The report also warned historic low interest rates are giving insurers trouble funding products sold in better economic times, and said total assets under management “probably fell” in the second quarter.