ECB Policy Debate Said to Skirt Loan Plan for Small Businesses

European Central Bank policy makers skirted a debate on how to boost lending to small and medium-sized companies at their meeting yesterday because officials haven’t yet drawn up a proposal, said three people with knowledge of the deliberations.

Five months after ECB President Mario Draghi said he wasn’t satisfied with funding conditions for small companies in some countries, officials are only now beginning to examine their options, the people said on condition of anonymity, because the talks are private. The Governing Council recently tasked committees to develop proposals, one of the people said.

Draghi said yesterday that financing conditions for small and medium-sized enterprises remain tight in several of the 17 euro-area nations. With the economy in its second year of recession and a fumbled Cypriot bailout rattling confidence among investors and entrepreneurs, policy makers are looking for new ways to foster economic growth.

The ECB is prepared to cut interest rates if the economy deteriorates further, Draghi said, without giving more guidance. The ECB kept the benchmark interest rate unchanged at a record low of 0.75 percent, as predicted by all but two of 56 economists in a Bloomberg News survey.

“We will assess all the incoming data in the coming weeks and we stand ready to act,” Draghi said at a press conference in Frankfurt.

Next Decision

At the same time, the ECB’s next course of action is uncertain. The central bank is wary of introducing measures which, like the Bank of England’s Funding for Lending Scheme, might have only limited success in boosting credit supply for companies, one of the people said.

“We will see which ones are either feasible or effective in our specific institutional context,” Draghi said. “One should always be mindful of what the ECB can do and cannot do.”

In November, Draghi drew attention to a lack of credit access for small and medium-sized companies.

“When we are asked whether we are satisfied with the financing conditions, the answer is: no, we are not satisfied at all,” he said then. “We are observing a fragmentation of the euro area, a re-nationalization of the banking systems, differences in the cost of funding that go beyond the fundamentals.”

Small and medium-sized companies account for about half of all employment in Italy and Spain, compared with about a third in France and Germany, and those companies have seen their borrowing costs rise relative to rivals in Germany since the beginning of the sovereign debt crisis.

In Italy, 75 percent of SMEs reported higher financing costs and 47 percent said banks were less willing to lend, the ECB’s latest survey of companies released in November showed. Spanish companies cited similar conditions, while in Germany and France the number of smaller companies that saw borrowing costs fall outweighed those facing steeper interest rates.

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