Euro Area Financial Conditions Continue to Improve, but...

Marc To Market's picture

The ECB reports that in the week to Feb 1, its balance sheet fell by 160 bln euros top 2.77 trillion.  This is the largest decline since Jan 2009 and largely reflects the early repayment of the first LTRO.  It is the smallest the ECB balance sheet has been since just before the second LTRO a year ago.     

In addition, new bank borrowing from the ECB has not replaced the longer dated funds.  In fact, on Friday, euro area credit institutions did not borrow overnight funds from the ECB for the first time in a month.


As we have noted previously, TARGET2 imbalances have fallen.  Recall that TARGET2 is the settlement system in the euro area.  During the worst of the crisis, central banks filled the breach left by the break down in the transmission mechanism by which private creditors in the surplus countries funded the current account imbalances of the deficit countries.  However, recycling northern Europe's surpluses back to the periphery has seen the imbalances decline.                                                                

The Bundesbank's claims fell by 38 bln euros in Jan to 617 bln, which is the least since March 2012 and represents a decline of 18% from its peak last August.  Italy's liabilities fell by 27 bln euros in Jan to 228 bln and are the lowest since Feb 2011.  Although Spain and Greece have yet to report, it would not be surprising to see that their liabilities also fell a bit in January.        

The most recent aggregate data on deposits is for December and there was a notable improvement in the second half of last year.  Spanish deposits rose 19 bln in Dec to finish the year at the highest level in a year.  Italian deposits rose 41.3 bln euros and finished last year at the highest since Jan 2003.  Greek deposits rose almost 6 bln to 156 bln. This was all retail deposits, which stood at 8 month highs in December.

At the end of February, European institutions that borrowed funds under the second LTRO will be able to make early repayments as well.  Estimates generally range from 150-200 bln euros.  The issue is not simply the reduction of the ECB's balance sheet from the repayment, but also what the freeing up of the collateral pledged to the ECB.  Since the collateral is generally assumed to be heavily weighted toward Spanish and Italian sovereign bonds, the question is raised will this impact demand at the government auctions.


Moreover, both Spain and Italy face home grown challenges.  In Spain, Rajoy's release of his tax filings has not satisfied his critics.  News of his salary increase during the austerity drive does not play well.  In Italy, the last polls before the blackout ahead of the election in a fortnight show a tightening race as the Monte Dei Paschi problems hit the center and center-left harder than the center-right.  Berlusconi is making a populist appeal, while the PDL has not fought back aggressively.  Monti too has not been as forceful as Berlusconi.                                                                   

Yet the big loser in Europe last week seems to have been France's Hollande.  He was rebuffed not once but twice.  First, his call for a medium term euro target and his concerns about the strength of the euro were countered by Germany and the ECB.  Germany played down the impact of euro's strength and was opposed to political influence.  Draghi also seemed not to emphasize the euro's strength, noting that it was near long-term averages.  He also seemed to caution against reading much into short-term fluctuations.


Second, Hollande was out maneuvered by Merkel on the EU's budget.  Merkel tacked toward the UK's Cameron and achieved the first cut in the EU's budget.  France's rebate was cut and as was spending for CAP (the agriculture subsidy scheme for which France is the largest recipient and is the largest single item in the budget).   As a partial offset, France did receive an increase in rural development funds.  However, with the UK displacing France as Germany's largest trading partner, a potential Berlin-London axis must be a new source of strain for Hollande.  Hollande did not do himself any favors by choosing not to attend a preliminary meeting with Cameron, Merkel and Van Rompuy.


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WTFUD's picture

There was a US Ambassador to Benghazi
Who looked and spoke like a Nazi
When the natives got wind
They burned down his bin
And fired a surface to air up his jacksey

Bear's picture

Duh ... the FED supplied European banks with 230 Billion in January ... where do you think this went?

medium giraffe's picture

Nice of Big Benny B to help pay off those LTROs....

Joe moneybags's picture

This article cannot be taken seriously because:

1.  It presented a few facts that support some improvement in the Eurozone

2.  It used no profanity or even hyperbole or sarcasm

3.  It ignored the influence of the Fed.

4.  It completely, and no doubt intentionally, gave Israel and Mossad a pass

5.  It failed to blame Bush AND Obama.

6.  It neglected both gold and the Second Amendment. WTF?

Thankfully, the comments to this slanted article will properly address these glaring errors and inconsistencies.

Bansters-in-my- feces's picture

This article is a fucking joke.

Ask the Fed.

trendybull459's picture

I would be title article by name:Eur air condition averoprates,left just gases from EU leading group of "smokers"

Common,come with us and save poeple lifes,vote for FED pool or let you idears shine:

orez65's picture

Bernake bought toxic debt from the US branches of major EU banks to the tune of $162 Billion US dollars last quarter.

Could that be were the currency to pay the ECB came from?


falak pema's picture

the attrition in Euro zone could end up showing resllience in two years, if the US run currency inflation race to bottom weakens the USD reserve hegemony even more.

The inevitable reset of US defense spending is an awaited event; it could trigger a moment of truth between Asset highs and economic fundamental lows in US economy. The Folies Bergeres split resilience, awaits all the actors of First world, only some more than others. Who can stretch their legs out most and for longest? 

2013 and 2014 will tell us the pecking order in this race to bottom and consequential deep splits between real economy and shadow fiat economy fallout. 

Its still pretty murky out there as the Oligarchy loves false flags and hates transparency.

Ghordius's picture

LOL - "a potential Berlin-London axis" - now this borders on sci-fi - London, perhaps, but not the City

Ghordius's picture

ah, isn't it a beauty? "TARGET2 imbalances have fallen", the LTRO loans are trickling back, the EU budget has been masterfully cut by Cameron, national budgets are getting more and more balanced, Hollande is not getting a softer EUR

mmmhhhh... sounds too good, too good - bring in the clowns

let's see what the currency warriors do next

mvsjcl's picture

No matter how hard I try to get differing results, all the numbers I see from Europe still keep adding up to Zero(hedge).

Ghordius's picture

what if ZH is 99% accurate when it comes to US matters but has... let's say less accuracy in reading some european matters?

From Germany With Love's picture

The Euro will not survive without yearly transfer payments from Germany to the periphery. The industrial basis in some of Euro nations is weak to non-existent. Either Germany pays or they will choose to leave. That is the reality of the Euro.


Ying-Yang's picture

or a bunch of help from the Federal Reserve....

gould's fisker's picture

And, if the numbers are close on collapse of French industry--production and plants--it's hard to see how the Euro can survive.  Recent French history back fifty years shows that things are going to have to get much, much worse, historically bottomed, before the French public will come to terms with the necessary reforms.  If France can't come about in such a way in the next few years, how can Germany alone hold this together; besides all the other injurious things happening in Italy and Spain now, and what the odds say other "bad" things happening as a matter of course.  This all smells like an ECB exercise to make chicken salad out of chicken shit, as the old saying goes.  I would rather things turn out well for everyone's sake, I just don't see it.

are we there yet's picture

An honest man in a den of thieves, a virgin in a bordello, a politician out to serve the public, a central banker who does not steal. EU issues honest transparent stats. It could happen. /sarc off

mvsjcl's picture

Frankly, Ghordius, I don't believe any government numbers, anywhere. You may have a point--God knows, I'm no expert--but common sense tells me that trust and fiat currency, quantity-wise, move in an inverse relationship in this day and age.

Yes We Can. But Lets Not.'s picture

I'm with you.  My first thought was, why believe any numbers coming from Gubmint, American or otherwise.

willwork4food's picture

 "News of his salary increase during the austerity drive does not play well."

Well, at least there was something Americans can relate to.

Fuck Congress.