* Lending to companies dips, household loans flat
* Banks in Italy and Spain gorge on government debt
* ECB seen leaving rates on hold after money supply data
* Constancio says ECB did not expect LTROs to solve crisis
By Paul Carrel and Sakari Suoninen
FRANKFURT/LONDON, March 28 Banks cut lending to
euro zone companies in February while those in Spain and Italy
stocked up on government bonds, suggesting the flood of cash
that the European Central Bank has pumped out has yet to bolster
flagging businesses in the wider economy.
The ECB funneled over 1 trillion euros into the financial
system with twin ultra-cheap funding operations in December and
February to head off a credit crunch that risked exacerbating
the euro zone crisis and threatening the currency bloc's future.
Governments are responding too by raising the "firewall"
around the euro zone to prevent contagion, but
ECB policymaker Jens Weidmann said this would only buy time and
that governments must tackle the roots of the crisis.
Speaking in London, he said that "just like the 'Tower of
Babel' the 'Wall of Money' will never reach heaven... If we
continue to make it higher and higher, we will, in fact, run
into more worldly constraints - both financial and political
"We must realize that all the money we put on the table will
not buy us a lasting solution to the crisis."
Weidmann, who also heads Germany's Bundesbank, called for
countries with current account deficits and excessive public
debt to implement structural reforms and consolidate budgets.
His comments are part of an ECB push to put the onus on euro
zone governments to address the causes of the crisis, rather
than looking to the central bank for help.
Indeed, the majority of economists in a Reuters poll on
Wednesday expected the ECB's next move will be to hike interest
rates from their record low 1.0 percent, although probably deep
into next year at the earliest.
Weidmann is leading a push by a group of ECB policymakers
for the bank to prepare for a shift to exit mode just a month
after it completed the second of the lending operations - or
LTROs - which doused the euro zone crisis at least temporarily.
ECB President Mario Draghi stressed on Monday the 3-year
loans were aimed at preventing a credit crunch, not supporting
sovereign debt markets - a view his deputy echoed on Wednesday.
"Our LTROs were to respond to the short-term funding
pressure and nothing else," ECB Vice President Vitor Constancio
said in Frankfurt.
"It never crossed our minds that we were solving the
sovereign debt crisis with this (the LTROs)," he added. "Banks
do not decide to give credit just because they have reserves."
February money supply figures released earlier on Wednesday
showed the monthly flow of loans to non-financial firms fell by
3 billion euros ($4 billion) after rising by just 1 billion
euros in January. The flow of loans to households was unchanged.
Banks tapped 489 billion euros from the ECB's first LTRO
late last year, and took another 530 billion euros at the second
operation on Feb. 29.
Additional ECB figures released on Wednesday showed Spanish
as well as Italian banks increased their monthly net purchases
of government bonds in February.
This will cheer many euro zone governments as evidence that
banks are plying the "Sarkozy trade" - a term adopted by markets
after the French president suggested that governments urge banks
flush with ECB cash to buy their bonds.
The new data, which captured the period just before the
ECB's record second injection of 3-year cash at the end of
February, showed Italian banks increased their holdings of
securities issued by euro zone governments by a record 23
billion euros, taking their total holdings to 301.6 billion
Spanish banks increased their holdings of securities issued
by euro zone governments by a hefty 15.7 billion euros. While
the rise was smaller than January's record 23 billion, it left
total sovereign holdings at a record 245.8 billion euros.
The data do not break down banks' holdings by issuing
country but the presumption is they focused on domestic debt.
Darkening the euro zone picture, Deutsche Bank AG
Chief Executive Josef Ackermann said questions over funding
Europe's troubled banks remain, as emergency liquidity
injections provide only temporary relief from an inter-bank
ING economist Carsten Brzeski said a credit crunch had still
not been avoided in the euro zone despite the twin LTROs.
"Saying that in the coming months we are more likely to
supply the economy with new loans and credit, right now that is
wishful thinking," he said. "This entire discussion driven by
the Bundesbank on the exit is clearly premature."
ECB ON HOLD
Orthodox economists in Germany worry that pumping money into
the economy will inevitably lead to price rises. Germans' angst
about inflation stems from the national experience of
hyperinflation in the 1920s, when money became all but worthless
and it took a wheelbarrow full of notes to buy a loaf of bread.
Data on Wednesday, however, showed inflation eased more than
expected in March.
Draghi has suggested that the huge infusion of money is not
an inflationary threat for now.
"The tentative signs we are seeing of a stabilization in
money and credit growth do not signal increasing inflationary
pressures over the medium term," he said in Berlin on Monday,
adding that the ECB stood ready to keep prices in check.
Weidmann said he expected more economic divergence in the
euro zone in the next few years and that Germany would see a
rise in inflation pressures. Preliminary data on Wednesday
showed German inflation slowed to 2.1 percent on the year in
March from 2.3 percent in February.
Overall money growth in the currency bloc pointed to a slow
recovery in the tight credit conditions at the end of last year
that led the ECB to embark on the 3-year funding operations.
Euro zone M3 money supply grew at an annual 2.8 percent in
February, up from 2.5 percent in January. A Reuters poll had
pointed to a reading of 2.4 percent.
The three-month moving average of M3 growth accelerated to
2.3 percent, remaining well below the ECB's reference rate of
4.5 percent, above which the bank sees dangers to medium-term
price stability. For table, see