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Loans Data Show Euro-Zone Split, Question LTRO Impact

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06/29/2012 | 09:53am EST

--Weak lending in euro zone's periphery signals continued tough times ahead

--Divergences between north and south of euro zone persist

--Data show deposits fled Greece in May amid heightened political uncertainty

--German deposits increased slightly in May

(Adds background on lending operation in fourth paragraph, Spanish comment in 11th paragraph. Rewrites headline)

By Tom Fairless and Todd Buell

Lending to households and businesses in May declined further in the euro-zone countries hit hardest by the region's debt crisis, data from the European Central Bank showed Friday, calling into question the effectiveness of the European Central Bank's huge injections of cheap cash for three years.

The data showed lending to households and companies fell 0.5% on the month in Spain and Portugal, 0.6% in Greece and 0.3% in Ireland. In Italy, lending fell a more modest 0.1% after rising the previous month.

By contrast, lending to German companies and households rose by a healthy 0.3% on the month in May, while lending in France was flat.

The ECB had reported earlier that lending to households and businesses in the euro zone as a whole turned negative in May after jumping in April by the most in seven months. April's rise was taken as a sign that the more than 1 trillion euros ($1.25 trillion) that the ECB injected into the banking sector at the end of last year and start of 2012 were filtering through to the real economy. The lending of that money for three years at low interest rates came under the bloc's Long Term Refinancing Operation (LTRO).

A separate survey published Friday by German research group Ifo showed credit constraints for German businesses tightening slightly in June, albeit from a low level.

"Despite growing problems arising from the euro crisis, German firms are still able to borrow money on favorable terms," Ifo said.

The ability of peripheral banks to lend was again partly constrained by their loss of funding from traditional depositors.

Private deposits flooded out of Greek banks in May, a period of acute uncertainty over the country's future within in the euro zone after national elections failed to give any party or coalition enough votes to form a government, and thus creating a vacuum in political decision making until after a June 17 re-run of the vote.

Retail and corporate deposits in Greek banks fell by 9.11 billion euros ($11.35 billion), or 5.3%, to EUR163.1 billion, their lowest level since March 2006, according to ECB data.

Private deposits at Spanish banks also fell EUR8.12 billion in May, or 0.5%, to EUR1.59 trillion, after dropping 1.9% the previous month.

A spokesman for the Bank of Spain attributed this in part to a change in the way it classifies deposits. Earlier this month Spain turned to the European Union for help shoring up some of its banks.

By contrast, private deposits at German banks rose EUR20.9 billion, or 0.7% on the month, to EUR3.14 trillion.

The outflow of funds from Greek banks may have abated after elections on June 17 resulted in the formation of a government that backs most of the terms of the country's international bailout, easing fears that the country would leave the euro zone. Newspaper reports following the election indicated that deposits to Greek banks were slowly starting to return.

Separately, the ECB's data showed renewed enthusiasm for government bond purchases among some peripheral euro zone banks.

Banks in Greece and Portugal became net buyers of government bonds in May after being net sellers in April. Italian banks, meanwhile, increased their net purchases to EUR12.3 billion from EUR6.1 billion the previous month, while Spanish banks sold only a net EUR287 million of government bonds in May, down from EUR798 million the previous month.

Write to Tom Fairless and Todd Buell at tom.fairless@dowjones.com

(David Roman in Madrid and Nektaria Stamouli in Athens contributed to this article.)

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