Eurozone Lending Drops and Opens the Door for ECB Rate Cut

By Roger Baettig | January 29 2013 9:04 AM

The euro was strong on Tuesday morning, trading steadily below $1.35. The currency has been on a high since Friday's announcement that eurozone banks will repay their European Central Bank loans earlier than expected.

Reuters

A man uses cross-country skis to make his way across the snow-covered Champs de Mars near the Eiffel Tower in Paris.

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On Friday, eurozone banks showed their growing strength as they announced they would repay 137.16 billion euros worth of three year loans that they borrowed from the ECB. The money, which was lent in both December of 2011 and February of 2012 will be returned on January 30th.

The news that banks were weaning themselves off of ECB funding confirmed the hopes of many that the eurozone was headed toward recovery in 2013.

Although the currency has been on the mend since early 2013, the region's economies still face a long road ahead. According to the Wall Street Journal, eurozone bank lending has stalled and serves as a reminder that the region isn't out of the woods just yet.

Southern European countries saw the steepest drop in lending, with loans in Spanish households falling 2.8 percent over a one month period. In Italy, Greece and Portugal credit for entities fell by 0.7, 0.5 and 0.6 percent respectively.

Northern European countries, which have tended to fare better throughout the eurozone crisis, even saw a drop as German lending was down 0.3 percent. The weakness opens up discussions among investors as to whether the ECB will keep interest rates constant at their next monthly meeting in February. Since the region hasn't had increased price pressure, many believe the ECB will consider cutting the region's already record low interest rates.