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Euro zone banks curtail credit access amid fresh pandemic worries

FILE PHOTO: ECB headquarters in Frankfurt

FRANKFURT (Reuters) - Euro zone banks are tightening access to corporate credit amid a resurgence of the coronavirus pandemic, fresh data showed on Tuesday, adding to already numerous arguments for the European Central Bank to add to stimulus.

With governments once again restricting economic activity, banks are growing worried about rising credit risk, potential damage to economic growth as emergency credit lines are keeping a range of companies afloat, particularly in services.

Banks had already curtailed access to corporate credit in the third quarter and expected to tighten further in the last three months of the year, reflecting concerns about the stalling recovery and governments' ability to maintain fiscal support measures amid a lingering downturn, the ECB said.

"Banks referred to the deterioration of the general economic outlook, increased credit risk of borrowers and a lower risk tolerance as relevant factors for the tightening of their credit standards for loans to firms and households," the ECB said in a survey of 143 large banks.

In the final three months of the year, banks expect a "considerable" tightening credit standards, the ECB added.

Tighter credit supply could choke off growth and force some companies into insolvency, pushing up unemployment and creating a self-reinforcing downward spiral.

"Are we heading into a credit crunch? In some sectors and for some companies," ING economist Carsten Brzeski said. "This will be the challenge for the ECB and for governments. It’s hard to tailor (ECB loan facilities) for hotels, restaurants and airlines."

But overall, credit supply is still holding up, suggesting that companies are accepting tougher terms in exchange for the cash.

Lending to non-financial companies expanded by 7.1% in September, unchanged since June and not far below a more than 10-year high of 7.3% hit in May, the ECB said separately.

"Spain looks like the worst," said Frederik Ductozet, a Strategist at Pictet Wealth Management. "It has been the case with all the high-frequency data and forward-looking indicators. It’s starting to look like a consistent story of a domestic recession."

Although tighter credit access is likely to worry ECB policymakers, the deterioration is not yet considered serious enough to prompt more stimulus when the ECB meets on Thursday, especially since the bank has plenty of untapped firepower at its disposal.

With the ECB lending cash at minus 1%, the cost of funding was not hindering lending. Instead, growing risk perceptions were making banks more cautious.

Still, most ECB watchers foresee the bank expanding its stimulus measures in December, when new economic projections are expected to show a slower rebound and could even hint at a risk of a double-dip recession.

(Reporting By Francesco Canepa and Balazs Koranyi; editing by Larry King)