Loan slump shows ECB's key problem still not fixed

FRANKFURT (Reuters) - Loans to households and companies in the euro zone contracted further in August, showing that the currency bloc's recovery is still fragile and that one of the European Central Bank's key problems is still not fixed.

The ECB has highlighted limited access to funding for small- and medium-sized enterprises (SMEs) as one of its main concerns in the past and has taken several measures to revive lending to those companies that form the backbone of the euro zone economy.

But despite its efforts, the central bank's record-low interest rates are still not feeding through evenly to the real economy in all corners of the currency bloc, keeping pressure on the ECB to keep rates low for a prolonged period.

ECB President Mario Draghi told the EU parliament on Monday the main reason for the still-depressed credit flows to SMEs was mainly due to lack of demand for funding from the companies themselves, while risk aversion by banks also played a role.

"The first reason for why SMEs don't borrow is basically lack of clients and the second reason was lack of banks' credit supply," Draghi said.

"The so-called rate of return on lending adjusted for risk in many of the stressed countries is just not high enough for banks to be persuaded to lend to SMEs," Draghi said at the time.

Data released on Thursday showed bank loans to firms fell 12 billion euros in August from the previous month after a fall of 17 billion euros in July. On an annual basis, such loans declined by 3.8 percent in August.

In Italy, loans to firms decreased by 4.7 percent in August from the same month a year earlier. In Spain, they were down 14.7 percent, the biggest reduction in any euro zone country.

The latest data backs the view that the ECB will keep interest rates low for the near term, Newedge Strategy analyst Annalisa Piazza said.

"Although the ECB made clear that the ECB cannot do much to boost credit to the corporate sector, we expect the current picture for loans to remain one of the key reasons behind expectations of a prolonged period of accommodation," she said.

Overall, loans to the private sector shrank by 2.0 percent from the same month a year ago, in line with a Reuters poll of economists, which gave a mid-range reading of -2.0 percent.

At the same time, euro zone M3 money supply - a more general measure of cash in the economy - grew at an annual pace of 2.3 percent in August, picking up slightly from 2.2 percent in July and above the consensus forecast of 2.2 percent in a Reuters poll of analysts.

"Ongoing muted money supply growth in August adds to the evidence that underlying euro zone inflationary pressures remain very low and that the ECB has ample scope to eventually take interest rates lower if it feels the need to act," Howard Archer, an economist at IHS Global Insight said.

Although he said the ECB was "highly unlikely" to cut rates at its next policy meeting on October 2.

(Reporting by Eva Taylor and Sakari Suoninen Editing by Jeremy Gaunt)