ECB not pushing large-scale intervention to revive lending

The European Central Bank (ECB) has decided against pushing any large-scale intervention to revive lending within the euro zone, dealing a blow to market hopes of intensive action.

Small and medium sized businesses that formed the backbone of the Spanish and Italian economies had seen their borrowing costs increase to unaffordable levels during the financial market crisis even as interest rates charged to their German counterparts prevailed at record lows, reflecting the ECB's rates.

The credit crunch, first revealed by the ECB's own data, had become one of the most visible examples of financial fragmentation dividing the 17-nation euro zone, prompting calls for action.

The ECB's review of the problem, however, suggested that the blockage in lending was the result of weakened bank balance sheets and would not warrant direct intervention in the SME borrowing process by the central bank.

The ECB had already announced that it was working with the European Investment Bank to devise ways for widening the access to financing for SMEs with the revival of market for asset-backed securities. The initiative had been viewed by senior officials as worthwhile but not likely to be concluded soon or to have a big impact.

Meanwhile, euro zone manufacturing output contracted less than estimated initially last month while UK factory index rose, underscoring European Central Bank (ECB) president Mario Draghi's view that the European economy was stabilising.

A gauge of manufacturing in the 17-nation euro area was up to 48.3 last month from 46.7 in April, London-based Markit Economics said yesterday. That was above an initial estimate of 47.8 on 23 May, the gauge had been under 50, indicating contraction, since July 2011.

In the UK, a report by Markit and the Chartered Institute of Purchasing and Supply showed factory index was up to a 14-month high of 51.3 from a revised 50.2 in April.

According Draghi, while the economic outlook in the euro zone was challenging, he still expected a recovery this year and that "there are a few signs of a possible stabilisation". That assessment was shared by Bank of England governor Mervyn King, who said in comments broadcast on Sunday that there were signs that the UK economy was recovering, though output had not expanded as fast they would have liked.

Royal Bank of Scotland Group senior European economist Richard Barwell said in London that both the euro zone and the UK looked in better shape than a couple of months ago. He added that there had been a huge improvement in confidence and financial markets.

He said the confidence that the world would not fall apart hopefully should now start to filter through to the average household and company.