UPDATE 1-Banks loosen purse strings for euro zone businesses

Wed Jul 30, 2014 6:37am EDT

* Euro zone banks make it easier for companies to borrow
    * Move is first loosening of lending terms for seven years
    * Borrowing picture differs from country to country

 (Adds detail, background, comment)
    By John O'Donnell and Paul Carrel
    FRANKFURT, July 30 (Reuters) - Euro zone banks have loosened
their lending terms for businesses for the first time since the
start of the financial crisis, the European Central Bank said on
Wednesday, reducing one of the chief obstacles to an economic
rebound.
    Since the start of a banking collapse, which struck Germany
in 2007 with the near failure of small-business lender IKB,
banks in Europe have remained reluctant to lend even as the
clouds of crisis gradually lift.
    Now the survey of banks by the ECB has shown a possible
reversal in this trend, with 3 percent of banks on balance
easing their lending terms for companies in the second quarter
while they predict a pick-up in such loan requests.
    "Credit standards for all loan categories eased," ECB
officials wrote in the closely-watched Bank Lending Survey,
viewed as a gauge of the euro zone economy.
    "For the first time since the second quarter of 2007, euro
zone banks reported a net easing of credit standards on loans to
enterprises."
    Economists gave the improvement a cautious welcome. "It's an
encouraging start," said James Knightley, an economist with ING.
    "The fact that we are finally beginning to see European
banks easing credit standards and recognising that there is
greater demand gives us more optimism."
    But the fragile nature of the improvement was illustrated by
the difference in loan demand across the euro zone.
    The disparity between export powerhouse Germany, which is
now seeing a boom in house prices, and weaker nations such as
Ireland, where borrowing is more expensive, remains one of the
biggest challenges facing the 18-country euro bloc.
    The ECB said on Wednesday that while banks saw an increase
in corporate loan demand in Germany and Spain, they reported
falls in the Netherlands, where economic growth has slipped, and
in France.
    "The big picture is for a gradual improvement," said
Berenberg bank economist Christian Schulz. "Demand up is good
news and reflects the lagging relationship between loan demand
and the economic cycle."
    
    CONFIDENCE SHAKY
    The positive snapshot, taken before the downing of a
Malaysian airliner over Ukraine and the imposition of European
Union sanctions against Russia under President Vladimir Putin
over its support of rebels there, could easily change.
    Business confidence in Germany, for instance, has already
dipped. A darkening mood amongst businesses would sap the desire
to invest or borrow.
    Schulz noted that banks are focusing on getting in shape 
for a review by the ECB of the euro zone's top lenders before it
takes on supervision of the sector in November.
    To breathe life into a sluggish euro zone, the ECB cut
interest rates to record lows in June and introduced a series of
measures to pump money into the economy. 
    The ECB's provision from September of new targeted lending
operations to banks should offset any uncertainty about the
impact on credit of the repayment of loans it made to banks at
the height of the euro zone crisis.
    "They should remove that uncertainty, if it was ever there,
and thus support credit supply," said Schulz, who was encouraged
by the second quarter growth picture in Spain and even Italy.
    "So for the euro zone as a whole, I'm not too worried. We
have the Putin factor and that is not going to go away. But that
hits Germany most, and it hits Spain least among the largest
(euro zone economies)."
    "We tend to focus very much on Germany because it has been
the driver of growth but Spain reporting 0.6 percent
quarter-on-quarter growth in the second quarter is by no means
something to be disappointed about - on the contrary, that's
quite exciting."
    For home loans, banks eased credit standards in net terms.
    
                                                  Q2    Q1     
 - Loans to businesses     
 Reporting tighter credit standards this quarter  -3     1    
 Reporting higher loan demand this quarter         4     2    
 Expecting tighter credit standards next quarter  -3    -5    
 Expecting higher loan demand next quarter        25    25 
 - Mortgage loans to households     
 Reporting tighter credit standards this quarter  -4    -5    
 Reporting higher loan demand this quarter        19    13 
 Expecting tighter credit standards next quarter  -1     1    
 Expecting higher loan demand next quarter        16     7 
    
    The survey of 137 banks was conducted from June 26 to July
11. 
    For a copy of the survey, click on: here

 (Reporting by Eva Taylor and Paul Carrel; Editing by Catherine
Evans)