–Economy, High Financing Costs Hit Bank Lending In Troubled Country

PARIS (MNI) – Portuguese banks surveyed earlier this month said
they expect to toughen lending conditions significantly in the second
quarter after having already tightened them sharply in the first three
months of the year, the Bank of Portugal said Wednesday in its bank
lending survey.

The expected new tightening in loan standards will affect both
corporate and private household lending, the central bank said.

At the same time, the central bank said demand for corporate loans
is expected to remain stable this quarter. However, “banks foresee a
significant decrease in loan demand from individuals, especially for
home-purchase loans.”

The Portuguese survey, which painted a far bleaker picture than the
Eurozone-wide lending survey published earlier Wednesday by the European
Central Bank, demonstrates the toll being exacted by the exorbitant
financing costs the country’s banks must pay and by the economic
stagnation due at least in part to the government’s severe budget cuts.

The factors weighing on banks’ decisions to tighten lending include
the cost of capital and balance sheet restrictions, as well as a “strong
deterioration of expectations with regard to economic activity in
general,” the central bank said.

In the recently ended quarter, the tightening of lending standards
was “particularly intense in the case of large companies and long-term
loans,” the Bank of Portugal reported. As regards household loans both
for consumption and home purchases, standards were “slightly more
restrictive” than in the final quarter of 2010.

The central bank noted that the adoption of more restrictive
lending criteria resulted in “more elevated spreads,” especially in
higher-risk loans. Banks reported an increase in commissions and other
charges related to interest rates, as well as a shortening of average
loan maturities.

Corporate credit demand declined in the first quarter, particularly
for longer-term loans. Companies had less need of funding for
investment, and there was less merger and acquisition activity to be
financed as well, the Bank of Portugal said. On the other hand, there
was some demand for loans driven by the need to restructure corporate
debt.

Loan demand dropped more sharply in the case of households,
particularly demand for buying homes. Declining consumer confidence, a
more negative outlook on the housing market, and a lower propensity to
buy durable goods all contributed to the decline.

The Bank of Portugal, like all central banks in the Eurozone that
contributed to the overall ECB Bank Lending Survey, asked domestic banks
an “ad hoc” question about access to money market funding of up to one
week maturity. Two of the banks surveyed reported a “considerable
deterioration” of access in the last three months; one institution said
it had experienced a “slight increase in difficulty;” and the rest
reported no change in access during the first quarter.

In the short- to long-term securitized debt market, banks generally
reported a deterioration of their ability to borrow, but in varying
degrees.

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