Businesses use their money to pay off existing loans which have become expensive due to rising interest rates. This trend, which has been strongly manifested since the beginning of the year and led to a slowdown in credit expansion in the first quarter of the year, continued in April at an unabated pace.

Repayments mainly come from highly liquid businesses such as energy and shipping and this trend is increasing as the average spread between interest rates on deposits and loans widens. To the extent that the increase in lending rates is a multiple of deposit rates, firms prefer to use their excess liquidity to repay expensive past loans.

This follows from the Bank of England’s loan and deposit data, which showed that high loan repayments outpaced new loans and led to a negative funding flow of €582 million for businesses and €789 million for the entire economy, i.e. joint lending to households. A negative funding stream means that the payments were larger than the new payments. and on the business side, this led to a reduction in outstanding loans to 70.7 billion euros in April from 71.3 billion euros in March and a slowdown in credit expansion to 8.2% from 10.3%. In total, in the first 4 months of 2023, the negative inflow of financing amounted to 925 million euros for enterprises and 1.6 billion euros for the economy as a whole.

The use of cash reserves to repay existing loans is also confirmed by the data of the Bank of Greece on the rate of deposits, which show decrease in the balance sheet of enterprises by 1.1 billion euros in April compared to the previous month, at 43.5 billion euros. It should be noted that, despite the large payouts, the liquidity of companies is at the highest level in recent years.

According to banks, the average interest rate in a business portfolio is over 5%, and although the cost of borrowing varies by sector and business size, it is the average cost of servicing old loans that were negotiated on the basis of Euribor. Based on the same data, lending in the first quarter of the year reached almost 7 billion euros, and banks estimate that loan growth will continue in the coming quarters, reversing negative funding inflows during the year. The Recovery Fund will be a key tool as the signed contracts will gradually translate into higher repayments at low borrowing costs.

For households, deposits increased by 1.1 billion euros to 142 billion euros. growth is mainly due to the payment of the Easter gift in April. The qualitative difference is the gradual transition to time deposits, the balances of which have strengthened by 1.2 billion euros in April and by 6.3 billion euros over the past 4 months, reaching 31.5 billion euros from 25.2 billion euros in January.

In household lending, the negative funding flow reached 156 million euros in April and 532 million euros in the 4th month, as repayments consistently exceed new repayments. In contrast to business, this is mainly due to low demand for new loans, i.e. lower repayments, as a result of which the portfolio, mainly housing loans, is shrinking at a faster pace, and stabilization is observed in consumer credit, which records a slight decrease. positive rate of credit expansion.