Credit conditions in the euro area are continuing to tighten, but at a slower rate, offering a tiny glimmer of hope for the region's debt-wracked economy, a key European Central Bank survey showed Wednesday.
In its latest quarterly Bank Lending Survey, which quizzed a sample of 135 banks in the euro area, the ECB said the proportion of banks expecting to tighten their loan criteria for businesses and households is declining.
The net percentage of banks reporting a tightening of lending standards declined to 7.0 percent in the first three months of this year from 13 percent in final quarter of 2012.
And that percentage is projected to remain stable at 7.0 percent in the second quarter of 2013, the survey showed.
The decline "reflected somewhat reduced contributions from banks' risk perceptions as well as from cost of funds and balance sheet constraints," the ECB found.
"This notwithstanding, borrowers' risk and macroeconomic uncertainty remain the main concerns of euro area banks in setting their lending policies," it added.
At the same time, the survey found that banks' access to retail and wholesale funding had improved in the first quarter of 2013 as the eurozone sovereign debt crisis abated, the ECB said.
On the demand side, overall demand for loans remained weak, but was expected to show small sights of improvement in the second quarter, the ECB said.
Among a wide range of emergency anti-crisis measures, the ECB has pumped unprecedented volumes of liquidity into the financial system to avert a dangerous credit crunch.
But banks have been slow to lend that money on to businesses, particularly in the countries hardest-hit by the crisis.
The ECB has repeatedly suggested that weak lending activity is primarily a result of low demand for loans.
Ernst & Young economist Marie Diron felt that it was "relatively good news that banks are tightening credit standards less than in previous quarters."
As such, the ECB survey "provides some relief in a week marked by disappointing data," she said.
"What the survey makes clear is that banks' own funding conditions are no longer a major concern. So the ECB's actions... have worked in this respect," the analyst said.
"But banks are still very risk averse and reluctant to use the liquidity provided by the ECB to provide loans to businesses and households," she cautioned.
UniCredit economist Loredana Federico said the survey "shows that banks are still tightening credit standards, although the pace of net tightening is slowing. This is good news as this suggests that the ongoing credit weakening should remain manageable."
Nevertheless, the data "continue to highlight that the uncertain macroeconomic environment holds back the improvement in lending standards, by affecting -- although in a more moderate way -- banks' risk perception and capital position," the analyst warned.
Commerzbank economist Michael Schubert said that from the ECB's point of view "the lack of lending to small and medium-sized companies (SMEs) in the periphery is a serious problem."
However, the ECB would probably see the survey results "as confirmation of its view that the central bank can do little to solve the problem," he said.
Natixis economist Johannes Gareis saw some "encouraging signs" in the survey, notably an improvement in funding conditions and continuing moderation in the impact of sovereign debt tensions.
Nevertheless, credit demand of corporate and household loans remained very weak "implying that the recent easing in financial tensions has still not reached the real economy," he said.
As a result, the ECB could cut interest rates at its policy meeting next week, especially given the gloomier outlook for the eurozone economy.
"The bank lending survey underlines this depressing picture," he said.
But as conventional monetary policy has its limits due to the fundamentally flawed transmission process of monetary policy, "it is possible that the ECB will present further unconventional measures targeted towards the improvement in financing conditions of small and medium-sized firms," he said.