As excess reserves in Europe continue to fall, prompting some to claim this is positive since banks are “no longer hoarding cash,” the reality of a dramatically deleveraging European financial system is far worse. As Goldman notes, lending to Non-Financial Corporations (NFCs) fell by a significant EUR17.2bn month-on-month (seasonally adjusted) in May (with a stunning 19.9% drop in Spain). Perhaps more worrisome, while NFCs have been seeing lower lending, households have been ‘steady’ for much of the last year – until now. Bank lending to households fell by EUR7.5bn in May. This marks the first material decline since July 2012. Simply put, the European economy (ad hoc economic data items aside) is mired in a grand deleveraging and since credit equals growth – and the ECB somewhat scuppered by a German election looming likely to hold down any free money handouts (and the fact that they cling to the OMT promise reality that is clearly not doing anything for the real economy) – with lending collapsing, growth is set to plunge further.
As we noted previously, there is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.
Still contracting bank lending in the euro area in May Bank lending to the private sectors keeps contracting; from -0.9% yoy to -1.1% yoy in May.
The fragmentation across countries is still pretty much marked. In Spain for instance, loans to non financial corporations contracted by 19.9% yoy in May!
Regarding the money supply, M3 resumed to its historically low trend at 2.9% yoy from 3.2%. As explained by Mr Draghi during its June ECB press conference, the stronger April reading was a consequence of several one-off factors, namely a base effect and the payment of the third capital tranche to the ESM. Assessing the credit conditions issue in the euro area remains one of the biggest challenges that are facing European policymakers.
Via Goldman Sachs,
Lending to Non-Financial Corporations (NFCs) fell by a significant €17.2bn month-on-month (seasonally adjusted) in May. The country breakdown showed that credit flows declined across France, Italy and Spain but increased in Germany. Broad money (M3) slowed from 3.2%yoy to 2.9%yoy, in line with expectations (Cons: 2.9%yoy).
1. Loans to Non-Financial Corporations, on a seasonally adjusted basis, declined by €17.2bn, after a fall of a similar magnitude in April (Chart 1). Adjusted for securitizations and sales, the figure was similar at €17.7bn. The declines seen in the past two months are somewhat larger than the more muted declines observed in Q1 this year.
2. Among the largest Euro area economies, contractions in bank lending were registered in France, Italy and Spain: loans to NFCs fell by €2.0bn in France, €4.2bn in Italy, and €10.6bn in Spain (equivalent to -0.4%mom, -0.5%mom and -1.6%mom of the outstanding stock of loans, respectively). By contrast, German bank lending to NFCs rose by €1.6bn (i.e. 0.1%mom of the stock outstanding, Chart 2).
3. Bank lending to households fell by €7.5bn in May. This marks the first material decline since July 2012. Unlike corporate lending, loans to households have remained broadly unchanged since last July, though with monthly loan flows well below their long-term average of €15bn.
4. Broad money (M3) and loans to the private sector continue to grow at diverging rates. M3 growth slowed from 3.2%yoy to 2.9%yoy, mainly driven by a further decline in short-term marketable instruments (M3-M2). Lending to the private sector edged further down to -1.1%yoy after -0.9%yoy. In normal times, money and loan growth move together (since advancing loans involves creating deposits), but the series have diverged since the end of 2011.The gap narrowed fractionally after today’s release.
5. Data on bank deposits across the Euro area were also released. NFCs’ total deposits in Cypriot banks declined by 3%mom in May, after a noticeable 18.7% decline in April. Cyprian households’ bank deposits fell by 0.9%mom, after a 3.1%mom decline in April.
6. We continue to expect bank lending dynamics to remain subdued. Interventions by the ECB (via 3-year LTROs and the announcement of the OMT programme) have helped to ‘stabilise’ loan flows and alleviated tensions in sovereign markets. But balance sheet adjustment in both the financial and non-financial sectors implies weak lending volumes. This is in line with the latest ECB bank lending survey, where banks expect both weaker demand and their own tighter credit standards.