* Loans to non-financial firms down 1.9 pct in August
* Bad debts up; government bond holdings steady
(Adds Banco Popolare pulling bond)
By Silvia Aloisi
MILAN, Oct 8 Italian banks are parking their
money in domestic government bonds rather than lending it to
businesses, central bank data showed on Monday, signalling a
worsening credit crunch in the euro zone's third largest
Lending to non-financial companies fell by 1.9 percent in
August from a year earlier, the fourth consecutive monthly
decline and the worst fall since the data turned negative in
Overall loans to the private sector, which includes
financial companies, were also down, by 0.2 percent, the first
contraction since February 2010, the data from the Bank of Italy
At the same time Italian banks kept their government bond
holdings roughly steady at 316.4 billion euros ($413.2
billion)in August - one billion euros less than in July. In
August 2011, the total stood at 212 billion euros.
The lenders have benefited from a glut of cheap European
Central Bank funds and higher customer deposits, but rising
levels of bad debts have made them increasingly reluctant to
extend credit to the private sector.
Instead, some of the ECB funds - borrowed by Italian and
other euro zone banks over three years at ultra-low interest
rates in tenders held in December and February - have been used
to help cover Rome's financing needs.
There has been a similar pattern in other countries on
Tensions on debt markets have eased over the past month
after the ECB pledged to conditionally buy bonds of troubled
euro zone countries. The yield on Italy's 10-year bonds stood at
5.08 percent on Monday compared to 5.85 percent in early
That has prompted some of Italy's biggest banks - including
Intesa Sanpaolo, UniCredit and Mediobanca
- to tap wholesale funding markets, which had largely
shut them out at the peak of the euro zone debt crisis.
But in a sign that some lenders are struggling to lure
investors, Banco Popolare pulled a 3.5 years senior
bond on Monday - its first attempt to fund itself on the market
since March 2011 - because there was not enough demand.
Tougher pan-European regulations have forced banks to
strengthen their capital base to better guard against economic
shocks, and this too has made them more selective in lending -
particularly as existing loans are increasingly turning sour.
The Bank of Italy data said bad loans had posted annual
growth of 15.6 percent in August from 15.4 percent a month
With Italy's economy forecast to be in recession this year
and next, credit quality deterioration is becoming a top concern
for investors. In a recent report, Morgan Stanley analysts said
bad debts at Italian lenders would probably approach 10 percent
of the loan book at the end of 2013.
On a brighter note, Italian savers are not pulling their
money out of the country, as has happened in Greece and, to some
extent, in Spain.
Private sector deposits at Italian banks rose 3.5 percent in
August, the first time since February 2010 they have grown by
more than 3 percent.
($1 = 0.7657 euros)
(Reporting by Silvia Aloisi; Editing by Anthony Barker)