ECB Cash Not Yet Benefiting Private Sector

-- ECB cash benefits governments, financial markets
-- ECB cash hasn't reached real economy
-- Italian sentiment improves, bond sales solid
-- Greece, Spain remain sore spots, ECB data show

FRANKFURT -- The European Central Bank's massive injections of cash into the banking system haven't yet reached companies and households but have benefited governments and improved market sentiment, as evidenced by various data released Wednesday.

Any signs that the ECB money is reaching the private sector "so far are disappointing and tight credit conditions remain a concern for euro-zone growth prospects," said Howard Archer, economist at IHS Global Insight.

Growth in lending to companies and households in the euro zone slowed sharply in February in annual terms compared with the previous month while the increase in lending to governments accelerated, ECB data showed.

Bank lending growth to the private sector slowed to 0.7% in February compared with the year-earlier period, after rising by an unrevised 1.1% in January, unadjusted ECB data showed.

Prompted by a deepening of the euro-zone debt crisis in the last five months of 2011, the ECB has lent more than EUR1 trillion to banks operating in the euro zone in recent months via its three-year loans in an effort to prevent a credit crunch and boost lending.

The ECB's long-term refinancing operations, or LTROs, have succeeded in averting the credit crunch. An important gauge of European banks' willingness to lend to their peers, the Euro Interbank Offered Rate, or Euribor, continued to ease Wednesday due to the plentiful ECB cash despite recent strains felt in Italian and Spanish government bond markets. Euribor--which measures the cost of borrowing euros for three months in the European interbank market--fell and was fixed at 0.787% Wednesday, down from 0.790% Tuesday. The rate was above 1.4% in early December.

Thanks to the ECB funds, banks' lending to governments grew at a 6.0% rate in February from 4.9% in January though lending to other parts of the economy remained weak.

Purchases of euro-area government debt by banks rose sharply, ECB figures show. Portuguese banks bought EUR4.24 billion worth of government bonds in February, versus only EUR543 million in January. Greek banks purchased government bonds to a value of EUR4.12 billion, a swing from being net sellers of bonds worth EUR128 million in January.

Italian banks bought a staggering EUR23 billion in euro-area government debt last month, even more than the EUR22.6 billion they bought in January in the immediate aftermath of the first LTRO. Spanish banks reduced their net purchases from EUR22.9 billion to a still-hefty EUR15.7 billion.

One beneficiary of the ECB cash has been the Italian government, which is also enjoying renewed investor confidence in the wake of Prime Minister Mario Monti's austerity measures.

The Italian Treasury Wednesday continued its series of solid debt sales, as newly confident investors accepted lower yields than at a similar auction a month ago, despite recent yield rises in secondary markets.

"Italy has gained the most in the post-LTRO landscape," said Nicholas Spiro, managing director at Spiro Sovereign Strategy, adding that the market is becoming more concerned about country-specific risks as the LTRO's psychological boost wanes.

Italy's business confidence index inched up in March as the outlook for production improved even though the prospects for orders languished, national statistics institute Istat said Wednesday. The manufacturing business confidence index rose to 92.1 in March from 91.7 in February.

Istat's separate quarterly survey of Italian exporters reported a decline in the number of complaints about access to credit but an increase in worries about cost factors, likely representing rising transportation costs in the wake of steeply higher oil prices.

But the ECB hasn't succeeded yet in its efforts to boost actual lending to the private sector. Bank lending growth to companies slowed in February to 0.4% from 0.7% in January and lending growth to households hardly changed at 1.2%, versus 1.3% in the previous month, adjusted data showed.

That confirms the ECB's warning that it may take several months for the three-year LTROs to feed through to the real economy.

"Money and credit growth may remain subdued for some time, before strengthening as a result of these three-year [loans] albeit recent data on money and credit growth also need to be seen in the context of the current subdued economic activity," the ECB said in its monthly bulletin earlier this month.

Negative signs continued to come from Greece and Spain. Adjusted ECB data show that deposits at Greek banks were just EUR170 billion in February, down from the peak of EUR245 billion in December 2009, after a drop of EUR4 billion in February and a EUR5 billion drop in January, Barclays Capital said. Spanish deposits fell by EUR6.4 billion, after a drop of EUR16.8 billion in January.

The wall of ECB cash so far poses no upward pressure on inflation. German inflation fell to 0.3% on the month and 2.1% on the year in March, from 0.7% and 2.3%, respectively, in February, official preliminary estimates showed Wednesday. Oil and clothing prices were the boosters while cheaper package holidays kept overall prices lower.

With energy and food prices stripped out, German core inflation remains well below the ECB's 2% price-stability ceiling, said economist Annalisa Piazza at Newedge. "Underlying pressures are non-existent as also suggested by the poor monetary aggregate report" from the ECB, Piazza added.