Lending to European companies has contracted of late despite mass injections of cheap cash provided by the Central European Bank (ECB). Lenders prefer to hoard loans rather than grant them to the private sector.
European Union lenders appeared less willing to grant loans to the private sector in May, official data from the European Central Bank indicated on Friday.
Loans to private, non-financial firms fell by 0.1 percent, missing economists' expectations for growth. Lenders granted 10 billion euros (&12.57 billion) less in May compared with the levels reached in April. Monthly flows to households amounted to a mere two billion euros, down from seven billion euros in April.
"That's a worrying sign," Berenbank Economist Christian Schulz told Reuters news agency. "It's a combination of recession and a credit crunch in some parts of the eurozone."
Parking lot for huge sums
The disappointing data quashed hopes that the ECB's recent mass injections of low-interest cash might kick-start confidence on financial markets. On the contrary, it added the central bank's growing list of reasons to cut interest rates during its meeting on July 5.
Market analysts have already penciled in a 25-basis-point cut to 0.75 percent and expect the low rate to stay in place until at least 2014.
The reluctance of lenders to risk granting loans to private sectors and household has translated into them hoarding huge amounts of cash or simply parking it at the ECB's overnight storage facility, although yields on the deposits are extremely low.