The Wall Street Journal-20080119-Credit Crunch- European Central Bank Survey Cites Risks to Economic Growth

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Credit Crunch: European Central Bank Survey Cites Risks to Economic Growth

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FRANKFURT -- The European Central Bank offered fresh evidence that the credit-market turmoil could dent economic growth, noting in its January bank-lending survey that euro-zone credit standards tightened at the end of 2007 and will tighten further early this year.

"The sharp [fourth-quarter] tightening reflects the deterioration of financial market conditions since the start of the financial turmoil last summer and a worsening of banks' situation," the ECB said.

The survey noted bleaker economic prospects and faltering housing markets as further reasons for the tightening, which it expects to continue in the first quarter, "reflecting possible longer-lasting effects of the financial turmoil." Demand for loans also slipped and is expected to fall further, on housing-market weakness and falling consumer confidence.

The outcome shows the financial-market crisis is having an effect on the overall economy, even though euro-zone broad money-supply growth has shown no real signs of cooling and remained at a record high in November.

"The days of easy credit appear to be over," said Martin van Vliet, an economist at ING Bank. That "provides strong ammunition for the doves on the ECB's governing council to continue to block calls for higher interest rates -- especially as bank lending remains the prime source of external financing for euro-zone companies."

On Jan. 10, the ECB kept its key policy rate at 4.0% but highlighted brewing inflation risks and left the door open for an interest-rate increase later in the year.

Corporate-credit standards tightened, particularly for loans related to mergers and acquisitions and corporate restructuring, according to the survey. Banks also reported a further net tightening in credit standards to people buying houses in the fourth quarter.

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