No Waking From Draghi's Monetary Nightmare: Eurozone Credit Creation Tumbles To New All Time Low

Tyler Durden's picture

One of our favorite themes in the past year has been watching Mario "Whatever it takes" Draghi reel powerless before the relentless contraction in Eurozone credit. Most recently, in November we reported that "when the ECB announced a "surprising" rate cut, 67 out of 70 economists who never saw it coming, were shocked. We were not. As we observed ten days prior, Europe had just seen the latest month of record low private sector loan growth in history. Or rather contraction. Back than we said that "one of our favorite series of posts describing the "Walking Dead" monetary zombie-infested continent that is Europe is the one showing the abysmal state Europe's credit creation machinery, operated by none other than the Bank of Italy's, Goldman's ECB's Mario Draghi, finds itself in."

We concluded: "we now fully expect a very unclear Draghi, plagued by monetary zombie dreams, to do everything in his power, even though as SocGen notes, he really has no power in this case, to show he has not lost control and start with a rate cut in the November ECB meeting (eventually proceeding to a full-blown QE) in order to boost loan creation." Less than two weeks later he did just that. The problem, as the ECB reported today, is that not only did M3 decline once more, to 1.4% or the slowest pace in over 2 years and well below the ECB's 4.5% reference growth value, but more importantly lending to companies and households shrank 2.1% in October - the biggest drop on record! Draghi's monetary zombies are winning."

* * *

Fast forward to today, when the ECB just announced the latest set of undead monetary statistics for November. To nobody's surprise, even though M3 posted the tiniest of possible annual increases, rising from 1.4% to 1.5% (3% below the ECB's 4.5% reference value which it considers consistent with its price stability mandate), loan creation to the private sector declined once again, this time dumping to -2.3% from a revised -2.2%. As the WSJ reports what we have said for the past year, "The deepening decline increases pressure on the central bank to embark on further measures to stimulate lending, analysts said."

By the numbers: in November lending to households declined by 3 billion euros ($4.1 billion) reversing the €3 billion increase in October, while lending to firms fell by €13 billion, following a €15 billion drop in the previous month. Loans to firms were down by 3.9% on the year.

And visually:

What does it mean for the future of ECB actions? The WSJ, citing the chief economist at IHS Global Insight in London said that "he expects the ECB to stand pat at its next meeting on Jan. 9, he thinks it will take more action early in 2014, "most likely" as another longer-term loan. It is "highly possible" that a future loan would be "tailored specifically toward bank lending."

Or, looking at the way the EUR is dumping this morning, the ECB may once again shock everyone and do much more than this action, which is already conventionally accepted, and not only take rates even lower but potentially engage in the first case of full blown QE. After all, following three failed SMP sterilizations, it is not as if even the ECB is pretending to be "sterilizing" its previous episode of QE.

Goldman's assessment:

While activity data in the Euro area have stabilised, we expect bank lending to the corporate sector to remain weak, reflecting a weak recovery, heightened credit risk aversion on the part of peripheral banks and continued balance sheet adjustment in the financial and non-financial sectors. The ECB's Asset Quality Review (AQR), based on banks' balance sheet as of end-December, might have contributed to weak bank lending in recent months.

That...or the cold winter weather of course. Cause there is always something to explain away central planning failure.

Finally those looking for the culprits for Europe's lending freeze, look no further than Italy...

... and, of course, a "recovering" Spain:

Source: ECB

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Cognitive Dissonance's picture

EU's turn to print moar. Full speed ahead and damn the fiat.

Popo's picture

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

-Ludwig Von Mises

Oldwood's picture

So much negativity. Whatever happened to the power of positive thinking?

Don't worry, be happy....

We just got to love ongoing legalization of pot. Go long junk food and SSI drug dependency disability.

Big Slick's picture



IMF Working Paper by Carmen M. Reinhart and Kenneth S. Rogoff – Dec 2013


“Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten”





Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.



The current phase of the denial cycle is marked by an official policy approach predicated on the assumption that normal growth can be restored through a mix of austerity, forbearance, and growth. The claim is that advanced countries do not need to apply the standard toolkit used by emerging markets, including debt restructurings, higher inflation, capital controls, and significant financial repression. Advanced countries do not resort to such gimmicks, policymakers say. To do so would be to give up hard-earned credibility, thereby destabilizing expectations and throwing the economy into a vicious circle. Although the view that advanced country financial crises are completely different, and therefore should be handled completely differently, has been a recurrent refrain, notably in both the European sovereign debt crises and the U.S. subprime mortgage crisis, this view is at odds with the historical track record. In most advanced economies, debt restructuring or conversions, financial repression, and higher inflation have been integral parts of the resolution of significant debt overhangs.


It is certainly true that policymakers need to manage public expectations. However, by consistently choosing instruments and calibrating responses based on overly optimistic medium-term scenarios, they risk ultimately losing credibility and destabilizing expectations rather than the reverse.


Financial repression is a form of taxation that, like any form of taxation, leads to distortions. However, perhaps because financial repression generally discourages financial excess, it is often associated with reduced frequency of crises,



Lesson 3: Crisis resolution. How different are advanced economies and emerging markets? Not as different as is widely believed.


There are essentially five ways to reduce large debt-to-GDP ratios (Box1). Most historical episodes have involved some combination of these. 

Box 1. The Elements of Debt Reduction

1. Economic growth

2. Fiscal adjustment-austerity

3. Explicit (de jure) default or restructuring

4. Inflation surprise

5. A steady dose of financial repression accompanied by a steady dose of inflation.


The first on the list is relatively rare and the rest are difficult and unpopular.5 Recent policy discussion has tended to forget options (3) and (5), arguing that advanced countries do not behave that way. In fact, option (5) was used extensively by advanced countries to deal with post–World War II debt (Reinhart and Sbrancia, 2011) and option (3) was common enough before World War II. Given the magnitude of today’s debt and the likelihood of a sustained period of sub-par average growth, it is doubtful that fiscal austerity will be sufficient, even combined with financial repression. Rather, the size of the problem suggests that restructurings will be needed, particularly, for example, in the periphery of Europe, far beyond anything discussed in public to this point.



Of course, if policymakers are fortunate, economic growth will provide a soft exit, reducing or eliminating the need for painful restructuring, repression, or inflation. But the evidence on debt overhangs is not heartening. Looking just at the public debt overhang, and not taking into account old-age support programs, the picture is not encouraging. Reinhart, Reinhart, and Rogoff (2012) consider 26 episodes in which advanced country debt exceeded 90 percent of GDP, encompassing most or all of the episodes since World War II. (They tabulate the small number of cases in which the debt overhang lasted less than five years, but do not include these in their overhang calculations.) They find that debt overhang episodes averaged 1.2 percent lower growth than individual country averages for non-overhang periods. Moreover, the average duration of the overhang episodes is 23 years. Of course, there are many other factors that determine longer-term GDP growth, including especially the rate of productivity growth. But given that official public debt is only one piece of the larger debt overhang issue, it is clear that governments should be careful in their assumption that growth alone will be able to end the crisis. Instead, today’s advanced country governments may have to look increasingly to the approaches that have long been associated with emerging markets, and that advanced countries themselves once practiced not so long ago.



VD's picture

they speak of the economy as this amorphous magical entity that is solely there to rescue policymakers...strange flavor of hopium even in flashes of some kind of lucidity...

Oldwood's picture

 So those who borrow in our name and spend our future earnings today are doing so to save us from their profligacy, and those of us who practice austerity (living within our means) are making the situation worse.....It sounds like to me we need even more highly educated professors running things....NOT. Everything and everyone one is rationalizing the ends justifying the means. The means are our lives, what we do and what we believe. The ends are what are written in history books years after we are gone, for people like Bernanke to digest and puke upon the next set of survivors. People KNOW what is right but continue down the low road because it feeds their weaknesses and besides....everyone else is doing it. There would be no crisis if there was no debt, at least debt that was highly collateralized. The fact that everyone is doing something almost guarantees it is wrong. People like every other creature on this planet instinctively knows what is beneficial to us, yet struggle every day to deny it.

RobD's picture

Always with the negative waves, Moriarty, always with the negative waves.

disabledvet's picture

and of course "doing QE is illegal in Europe...and for a very good reason." this can force industries to have to start selling entire industries in the name of becoming "financialized"...something the USA had to do back in the 80's to confront "cheap" Asian imports. As Japan shows QE does not cushion the blow but makes it worse. I would argue they need a major re-write of tax law ove there and a big push for lowering trade barriers between the EU and the US. I would say hell would freeze over before this would happen of course.

101 years and counting's picture

Draghi can't wait for German Cardinals to rule the OMT is illegal (my bet for this yr's black swan) and to watch all the peasants lose all their "wealth"

Grande Tetons's picture

I am going to miss the EUR/JPY levitation charts. I guess the algos can switch to NZD/JPY or AUD/JPY. 

Dr. Engali's picture

It's no surprise. The people who need the credit are completely under water and  can't get it. The people who can get the credit don't need it because their asset prices are soaring thanks to the money printing which, by the way, is pushing the former further under water.

put_peter's picture

Negative rates 4eva. And we are saved by a miracle!

101 years and counting's picture

the only expansion i see are the lies being told.

shovelhead's picture

Lending will pick up again as soon as Greece and Spain come back to the gruel pot for MOAR.

Oldwood's picture

So its time to buy, right?

Headbanger's picture

What the wolverine thought of me.....

ChaosEquilibrium's picture

Excellent article!  Euroland is doomed!...and by logical extension in the current paradigm-THE WORLD


SOLUTION-Global Reset!

kurzdump's picture

Global reset means global shutdown. Our system will halt in case of a restart attempt. BSOD.

Oldwood's picture

A worldwide loss of confidence in money will force (no one could see it coming) a single world currency banked by a world bank and accountable to no one. This currency will be fully digital (no paper) for our protection and the ever present government provided "efficiency" with a limited time window to exchange old currencies and PMs for the only "legal" tender. Fuck gold and fuck cash and fuck anything of self preservation and defense. We are being ring fenced and the perimeter is tightening. You can smell it in the air. It smells like shit. The couped chicken headed for the stew pot.

Temporalist's picture

You're right of course.  One of the reasons they will not want to print actual bills anymore will be the excuse "to save money" which of course is nonsense.

kurzdump's picture

Once the new currency is in place it will be the right time to pull some electricity pylons.

q99x2's picture

Arrest Draghi. Throw him into prison. Use drones to swoop down upon him and carry him to the starving people.

Colonel Klink's picture

You had me at "arrest Draghi".

SheepDog-One's picture

COME ON you damn peasants! Borrow this fakemoney at interest from us central plansters so we can continue living as parasites!

Colonel Klink's picture

Why do I get the feeling this is just a repeat of the history of Europe?  All by design.

It's going to get rough, buckle down!

Sudden Debt's picture



Temporalist's picture

Absolutely SD and the longer the "recovery" lasts the bettererer it will be.  HuffPo, CNBS, Bloomberg, and others all told me so.

Colonel Klink's picture

Because by now people are so poor they can't even PAY attention!

Debugas's picture

new deal - negative interest rates - borrow 100000 to buy a new car today and then return only 90000 years later.

alternatively whenever customer buys a car Draghi could simply pay part of the sum to the producers

shovelhead's picture

Thank God that Europe's fixed:

Being old in Italy doesn't mean being lonely.


NoWayJose's picture

How long does it take for people (outside of ZHers) to realize that you cannot stimulate 'lending' by handing out free money to the banks -- especially when you say that there will be free money for the next several years?  Companies have previously taken free money -- and used it to build factories in China - way overbuilding in fact - so they don't need to 'borrow' to build even more.  And as Japan has found out, you cannot weaken your currency (and buying power of your people) in hopes of stimulating domestic demand.  There are really only two things that will work - one would be the 'Walmart Special' where you say that there will be 100 Giant TVs on sale on Friday and when they are gone the price goes up.  This would be something like announcing a future date when QE ends or rates rise -- such that banks and corporations rush to beat the deadline.  The second way would be to lower the cost of living for your own people - basically a Reaganomics formula of lower taxes and less regulation - essentially getting government out of the way of any recovery.

Oldwood's picture

But that would mean giving up control for them to let us keep and spend our own money. We might spend it on politically incorrect agendas or not spend it at all. Can you imagine the disaster that a people of free will would set upon the world of those dedicated to our salvation (even if it kills us)? There is no greater, more powerful and demanding God than that of the State! All other Gods and ideologies must fall away if we are to be saved and the world made into a better and safer place for the self-chosen ones.

andrewp111's picture

China's central bank can increase lending on command because the government owns and controls the banks. It is pure command and control. The EU will have a much harder time doing this unless the EU is willing to have government owned puppet banks lend directly. They may yet do this. It would make a good use for their government owned congomerations of failed banks.

Peter K's picture

Haven't you got the memo. It's the new springtime in Euroland.

moneybots's picture

 "The deepening decline increases pressure on the central bank to embark on further measures to stimulate lending, analysts said."


Lending has been over stimulated, which is why there is a deepening decline.

moneybots's picture

“Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten”


Lessons were not forgotten.  Lessons were learned long ago and are well known.

Glass Steagall was not dismantled because someone forgot a lesson.  Glass Steagall was dismantled because it got on the way of certain people making a boat load of money.

I am reallly tired of this lie that lessons were forgotten.  Financial fraud is what happened.  Glass Steagall was deliberately dismantled so financial fraud could take place.  It is deliberate that no banker is in prison for committing massive financial fraud.  No one forgot it is illegal.

Nothing has been fixed and the financial fraud continues.