Banks not using cash for loans

A European Central Bank (ECB) report on the state of credit across the eurozone showed yesterday that Greek banks channel most of their cash flow toward refinancing past obligations and loans and not to local households and enterprises. ECB Vice President Lucas Papademos, who is Greek, called on banks to strengthen and accelerate lending, while speaking to a German financial newspaper. He suggested that «it is in their best interest to provide considerable help to the economy.» Despite the injection of 442 billion euros by the ECB last month alone, the sums that European commercial banks allocate to deposit accounts have shrunk significantly. Regarding Greek banks, by participating in the auctions of the ECB, they have secured the much-desired cash flow, while they are extending their obligations by borrowing again. This absorbs a major portion of the cash flow offered by the ECB. The needs for refinancing are constant and, given that no financial rebound is expected before 2010, banks are making the most of the cheap money supplied to them by the ECB to manage the needs of their portfolios. Furthermore, given the lack of serious demand for loans from healthier households and enterprises, since in conditions of recession they are much more reserved, the desired issuance of credit to the private sector is delayed and all estimates seem to agree that there will be a decline in the credit expansion rate for the entire year to just 5 percent, if not lower. After all, Greek bankers note, the economy remains in a tenuous state and the biggest threat is the fiscal prospects of the country. The fear of a new sharp rise in the spread between Greek bonds and the German bund or of a credit rate downgrade is a daily worry. The prospect of the rise in unemployment to above the 9.5 percent level remains a nightmarish scenario, as that would abolish any hopes of an exit from the crisis even when the European economies regain balance.