Moreover, credit is not getting dearer.

According to the ECB, interest rates on loans to the private sector have not changed on average. On loans to non-financial corporations, they have fallen slightly: Banks' overdraft interest rates have gone down, from 6.62% in December 2007 to 6.54% in April 2008. On loans up to ?1 million, floating rate and over-five-years initial rate fixation have gone down from 5.30% in December to 5.22% in April and on loans over ?1 million, up to five years rates have gone down from 5.48% to 5.39%. In the case of interest rates on loans to households, banks' overdrafts have gone slightly up from 10.46% in December 2007 to 10.55% in April 2008, as well as in the case of loans for consumption floating rate and over-five-years initial rate fixation, which have increased slightly from 8.17% to 8.45%. Interest rates for house purchase have come down slightly. For loans floating rate and over 10 years initial fixation rate, they have gone down from 5.18% to 5.11% in the same period.

Defiant behaviour

It is really difficult to understand why the increase in banks' borrowing costs, their continuous increase in write-downs, the incorporation of vehicles into their balance sheets, their re-pricing of risk, and the increase in their non-performing loans ratios are not having a more negative impact on the flow and the price of their loans to the private sector in the euro area.

Some reasons include:

• In the case of corporations, is that banks have maximum loan and price commitments to their main clients that contractually are still in force and have not been disposed yet by borrowers.
• In the case of private equity funds and hedge funds, (which actually have increased their annual growth rate from 22.2% in April to 25.7% in May) might be that banks seem to be at ease with their average collateral ratio of 90% of loans and because most of them have met their banks' margin calls on time by de-leveraging.
• Unlike in the US, many euro area large banks did not create special vehicles off-balance sheet or they were very small.
• The average small and medium size company in the euro area is not much indebted and that most households have taken loans to invest in houses and not for consumption and that they have seldom used equity withdrawals.
• Many large European corporations still have sound financials and good ratings.

Will this soft loan and interest rate trend persist longer or is it going to change if the credit crisis continues biting the euro area banks balance sheets? Time will tell.