Loans flow from Europe’s central bank, but analysts debate if they’re a cure or a crutch

Throughout his waning months in office, European Central Bank President Jean-Claude Trichet boasted that he had avoided the excesses of his counterparts at the U.S. Federal Reserve and kept the ECB’s response to his continent’s financial crisis relatively modest.
It has taken his successor, Italian central banker Mario Draghi, less than three months to upend that approach, triggering a debate about whether the ECB has quietly solved the euro-zone debt crisis or simply postponed a reckoning by shuffling hundreds of billions of dollars among banks, governments and the central bank’s own coffers.

As it did in December, the ECB this week is again offering inexpensive three-year loans to euro-region banks. Market analysts expect the central bank to provide new loans worth a trillion dollars or more, putting the ECB on a fast track to catch the Fed.
The policy has stabilized European finances in recent weeks, contributing in a roundabout way to a decline in the exorbitant interest rates that some heavily indebted governments had to pay. After the first round of ECB loans, banks spent some of the money on government bonds, and Italy and Spain as a result saw a drop in the cost they had to pay to attract bond investors.
The banks also began to retire their own bonds, reducing the competition for money on private markets. And bank lending to households and businesses ticked up.
These were all reassuring developments after an autumn consumed by fears that the region’s debt crisis would lead to a breakup of the euro zone.
“There are tentative signs of stabilization,” Draghi said at a recent news conference on ECB policy.
But some analysts and bankers are warning that the policies under Draghi could leave the European financial industry addicted to cheap ECB loans that will be difficult to replace if the region’s economy remains stagnant.
For a variety of reasons, the euro zone remains in trouble. The region is heading into recession, and governments are scrambling to restructure economies ill-suited to compete globally or support the costs of aging populations.
Greece, the region’s hardest-hit country, is in the midst of a bond restructuring that will shape its future. If all goes smoothly, the exchange of new, less-expensive bonds for older ones will greatly reduce the country’s outstanding debts and pave the way for a large package of new international loans. But the debt restructuring has left the country in technical default on its bonds, possibly triggering the insurance payments to bond holders — a development that some analysts worry could stigmatize the euro region for years.
If nothing else, the ECB loans have bought time and helped the currency union through a bulge of borrowing required by governments and financial companies in the first months of the year.
The ECB lending program was launched at a critical moment, when borrowing costs for Spain and Italy were at such a high level that they might have needed a bailout that the rest of Europe and the International Monetary Fund could ill afford. As those rates have dropped, Spain has actually accelerated its borrowing for the year to take advantage.
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As chances for bank loans shrink, Britain’s small firms struggle

Reporting from Redhill, England—
It’s as if someone is “holding your throat and choking you slowly.”
That’s how one analyst vividly describes the squeeze on lending in Europe these days. Scared by the euro debt crisis and a flat-lining economy, banks have been tightfisted with their money, refusing to issue many of the loans that companies desperately need to keep their operations running smoothly or to take them to the next level.
That has added to concern that the world may be heading for another credit crunch hard on the heels of the last one, which was triggered by the 2008 financial crisis and helped tip the global economy into recession.
Here in Britain, Prime Minister David Cameron’s office reckons that banks have already entered a second ice age. In other parts of Europe, especially the weakest of the 17 nations that share the euro, credit has also begun freezing up, analysts say.
The squeeze has sent businesses scrambling for new ways to finance their activities and fostered an alternative market that bypasses Britain’s big “high street” banks in favor of lending houses and venture capitalists.
Among the innovators is the online lending site Funding Circle, which is sort of an EBay of commercial lending. Creditors specify the amount they’re willing to put up, and at what interest rate, in a loan auction for companies in need of the money. The overall loan is pieced together from the best bids, sometimes dozens of them, many of which are submitted by individuals who invest as little as $30.
After little more than a year in operation, Funding Circle facilitated loans worth more than $5 million in November, including $1.6 million within a single week. Businesses usually receive the money within a couple of weeks, compared with the three to six months it can take a bank to process an application.
“We knew that small businesses, even good-quality small businesses, would be underserved” by mainstream financial institutions, said Andrew Mullinger, one of the website’s founders. “They don’t have the clout of the big companies and couldn’t demand services.”
Gerard Oates’ company, Arcadia, sells bulbs and fittings for aquariums and vivariums. Not long ago, he hit on a bright idea for a lamp using cutting-edge technology, which he shopped around to various banks for the financing to develop it.
Every one rebuffed him.
“We needed money, and it wasn’t there,” Oates said, recalling the frustration of repeated rejections. “We had all these product ideas and not the wherewithal to realize them.”
He was “absolutely in shock” when he discovered that he could draw his $118,000 loan less than a week after his request appeared on Funding Circle.
Arcadia’s new 30-watt lamp debuted in December to better-than-expected sales, and is on track to become “the most successful product we’ve ever had,” Oates said.
But plenty of companies haven’t been so lucky in their quest for financing. And in a worrisome sign, many of Europe’s banks have curtailed lending not just to private companies and individuals but to each other, constricting the flow of money that lubricates market economies and keeps them humming.
Last month, the European Central Bank surprised many economists with its announcement that it would be doling out a record amount of money in special low-interest three-year loans to the region’s struggling financial institutions. More than 500 banks signed up to borrow a staggering $640 billion, evidence that many are having trouble drumming up cash.
The hope is that they’ll hand out some of their new funds from the ECB as commercial loans and buy up bonds of financially troubled nations such as Italy and Spain. But economists say it’s also likely that many banks will hoard the extra money to beef up their reserves in the event of an emergency.
That would be bad news for business owners whose own reserves are running low and who need the banks to help tide them over, for example, shopkeepers who traditionally require a boost through lean winter months.
“There were savings that were accumulated over time which were able to fill in for some of the loss of access to credit,” said Sony Kapoor of the think tank Re-Define.
But with those savings close to tapped out, “we are going to see a very serious problem,” Kapoor said. “We’re going to see a contraction of the exact part of the economy — small and medium-sized enterprises — that are most useful to generating growth.”

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As chances for bank loans shrink, Britain’s small firms struggle

Reporting from Redhill, England—
It’s as if someone is “holding your throat and choking you slowly.”
That’s how one analyst vividly describes the squeeze on lending in Europe these days. Scared by the euro debt crisis and a flat-lining economy, banks have been tightfisted with their money, refusing to issue many of the loans that companies desperately need to keep their operations running smoothly or to take them to the next level.
That has added to concern that the world may be heading for another credit crunch hard on the heels of the last one, which was triggered by the 2008 financial crisis and helped tip the global economy into recession.
Here in Britain, Prime Minister David Cameron’s office reckons that banks have already entered a second ice age. In other parts of Europe, especially the weakest of the 17 nations that share the euro, credit has also begun freezing up, analysts say.
The squeeze has sent businesses scrambling for new ways to finance their activities and fostered an alternative market that bypasses Britain’s big “high street” banks in favor of lending houses and venture capitalists.
Among the innovators is the online lending site Funding Circle, which is sort of an EBay of commercial lending. Creditors specify the amount they’re willing to put up, and at what interest rate, in a loan auction for companies in need of the money. The overall loan is pieced together from the best bids, sometimes dozens of them, many of which are submitted by individuals who invest as little as $30.
After little more than a year in operation, Funding Circle facilitated loans worth more than $5 million in November, including $1.6 million within a single week. Businesses usually receive the money within a couple of weeks, compared with the three to six months it can take a bank to process an application.
“We knew that small businesses, even good-quality small businesses, would be underserved” by mainstream financial institutions, said Andrew Mullinger, one of the website’s founders. “They don’t have the clout of the big companies and couldn’t demand services.”
Gerard Oates’ company, Arcadia, sells bulbs and fittings for aquariums and vivariums. Not long ago, he hit on a bright idea for a lamp using cutting-edge technology, which he shopped around to various banks for the financing to develop it.
Every one rebuffed him.
“We needed money, and it wasn’t there,” Oates said, recalling the frustration of repeated rejections. “We had all these product ideas and not the wherewithal to realize them.”
He was “absolutely in shock” when he discovered that he could draw his $118,000 loan less than a week after his request appeared on Funding Circle.
Arcadia’s new 30-watt lamp debuted in December to better-than-expected sales, and is on track to become “the most successful product we’ve ever had,” Oates said.
But plenty of companies haven’t been so lucky in their quest for financing. And in a worrisome sign, many of Europe’s banks have curtailed lending not just to private companies and individuals but to each other, constricting the flow of money that lubricates market economies and keeps them humming.
Last month, the European Central Bank surprised many economists with its announcement that it would be doling out a record amount of money in special low-interest three-year loans to the region’s struggling financial institutions. More than 500 banks signed up to borrow a staggering $640 billion, evidence that many are having trouble drumming up cash.
The hope is that they’ll hand out some of their new funds from the ECB as commercial loans and buy up bonds of financially troubled nations such as Italy and Spain. But economists say it’s also likely that many banks will hoard the extra money to beef up their reserves in the event of an emergency.
That would be bad news for business owners whose own reserves are running low and who need the banks to help tide them over, for example, shopkeepers who traditionally require a boost through lean winter months.
“There were savings that were accumulated over time which were able to fill in for some of the loss of access to credit,” said Sony Kapoor of the think tank Re-Define.
But with those savings close to tapped out, “we are going to see a very serious problem,” Kapoor said. “We’re going to see a contraction of the exact part of the economy — small and medium-sized enterprises — that are most useful to generating growth.”

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