European Money Up, Loans Down; Or Why The LTRO Is Still A Failure
One of the more mythical aspects of the LTRO, at least during its conception, is that the ECB repo operation would facilitate the diffusion of credit and loans to the broader population (and only subsequently was it made clear that the LTRO was there merely to prevent the disorderly insolvency of European banks). Alas, today's liquidity update from Europe shows that absolutely nothing is happening as planned, because even as broader money may have picked up, loans are once again declining.
Broader liquidity in the economy picked up for the third consecutive month in March, with M3 rising +0.6%mom. On an annual basis, M3 growth increased from +2.8%yoy to +3.2%yoy in March, while loans to the Euro area private sector declined further, contracting by another EUR6.8bn after last month’s fall of EUR11bn (Charts 1 and 2).
Lending to private, non-financial corporates declined by EUR5.5bn. Loans to households grew by EUR6.1bn (after last month’s flat reading), but remain well below the average monthly gains of EUR17bn over the series’ history.
While it is still too early to fully assess the effectiveness of the ECB’s recent non-standard measures - with three months of data now available since the inaugural 3-year LTRO – there is no evidence, at least so far, that the liquidity provided led to any rebound in the lending dynamics to the real economy.
It may, however, not only be liquidity constraints that are holding back lending. A need for banks to increase capital ratios is certainly also playing a role. Moreover, weak demand for lending is also a factor. Demand for credit is likely to remain weak for some time given subdued economic activity. The latest ECB lending survey hints in that direction with only 9% of the 131 Euro area banks polled tightened their lending conditions in the past three months (Chart 3).
And finally, just to keep M2 "growth" in perspective, here, as shown over the weekend when explaining the endless confusion over American "decoupling", is how Europe stands in contrast to the US.