ECB President Jean-Claude Trichet criticised banks for simply returning much of the vast sums it has supplied to them, instead of lending the money on to firms and households to secure a recovery from Europe's worst recession in decades.
"We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes," he said in Munich. "It may take some time, however, for the extra liquidity to be transformed into credit."
Last month the ECB injected 442 billion euros ($620 billion) of 12-month funds into the banking system to encourage them to finance the real economy. But, worried about their own health, the banks parked much of that money in the safest place they could find -- back at the ECB -- potentially delaying recovery.
Evidence began emerging around late March that the global recession was starting to bottom out, driving a second-quarter rally in share markets. But weak data in recent weeks has boosted fears that stock prices had run ahead of the prospects of a solid recovery in the second half of this year.
Such doubts hit Asian and European markets. [nLD67974] Shares fell as investors fretted about a coming wave of company earning reports, and oil dipped briefly below $59 a barrel on fears that demand will tail off if the economy stutters. CLc1
JAPAN, CHINA GIVE HOPE
Despite fears that the worst may not be over, Geithner said there was a good chance the United States and other leading economies would resume growth, though uncertainty remained.
"In my view there are still significant risks and challenges ahead," he told reporters in London when asked if he feared a possible double-dip recession. [nLAK000461]
"We have a very powerful set of policies in place, coming on stream. I think there is a very good chance we will see the U.S. economy and the world economy get back to recovery, get growing again, over the next few quarters."
That positive outlook was supported by evidence from Japan, the world's second-biggest economy, and China.
Industrial output in Japan, which is deep in recession, rose 5.7 percent in May from April, revised data showed, and a measure of companies' capacity utilisation rose. [ID:nT184581]
In contrast to ECB concerns over sluggish lending, China is worried that a boom in lending as its strives to achieve eight percent GDP growth this year will cause new speculative bubbles.
Li Dongrong, an assistant governor of the People's Bank of China, said Beijing would strengthen oversight of lending to ensure credit is reasonably controlled and properly channelled.
"We are experiencing many complicated, unprecedented changes in economic and financial conditions, both at home and abroad, which have created new challenges for monetary and credit policy," he said in comments on the PBOC website.[ID:nPEK368921]
Chinese banks extended a massive 1.53 trillion yuan ($223.9 billion) in new loans in June in a fresh show of support for the government's drive to hit eight percent growth in 2009.
Concern is growing that this credit is inflating new stock and property bubbles and could sow the seeds of a new crop of bad loans at mostly state-controlled banks.[ID:nPEK122994]
MARKETS NERVOUS
In the United States, stocks fell as caution about an upcoming spate of earnings remained.
A number of major U.S. firms including Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Intel (INTC.O: Quote, Profile, Research, Stock Buzz), JP Morgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) are due to report earnings this week. [ID:nN12536585]
Earlier, Dutch conglomerate Philips Electronics (PHG.AS: Quote, Profile, Research, Stock Buzz) surprised the market with a return to profit in the second quarter and said it was hopeful of an upturn in business in the second half of 2009.
But that did not stop world stocks as measured by MSCI .MIWD00000PUS from losing close to 0.2 percent on Monday, down from earlier losses of three quarters of a percent.
The FTSEurofirst 300 index of top European shares rose more than 1 percent, but only after hitting an 11-week low earlier in the day.
"I don't think we will see an economic recovery this year and ... earnings estimates are still too high, so there is room for disappointment," said Philippe Gijsels, senior equity strategist at Fortis Bank, in Brussels.
In Tokyo the Nikkei .N225 fell 2.6 percent to its lowest close in eight weeks, hurt by growing political uncertainty after news that embattled Prime Minister Taro Aso was set to call a general election for Aug. 30. [.T] [ID:nT353403]
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