European Money Up, Loans Down; Or Why The LTRO Is Still A Failure

Tyler Durden's picture

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.

From Goldman:

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.

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Seer's picture

So, it really is true that you can't push on a string?

Ghordius's picture

lol, if you "credit freeze" the string than you can push with it for a short while

jaffa's picture

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jonytk's picture

So the Chart 3 proves the "money as debt" yuotube vids?
No loans=no money

I'm asking because everyone is trying to pay his mortage as crazy here in Spain...

Ghordius's picture

that's an example of demand going down

don't get me started on the "money as debt" thing, it's a "useful" simplification

you could make the exact point as "money is credit" or "money is trust"

RECISION's picture

the ECB repo operation would facilitate the diffusion of credit and loans liability to the broader population 

There, fixed it for ya...

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evolutionx's picture

Look at this: ECB accepts Portugal Bonds due Dec. 31, 9999

No joke: the European Central Bank accepts a Portuguese bond from the year 1943 as collateral due for repayment on Dec. 31, 9999. The ECB has turned into the dumping ground for European banks' junk bonds. The practice could harm the central bank's reputation as well as the Euro. The ECB issues Euros for almost everything. - But it does not help...

Seer's picture

Nothing is backed by anything, it's ALL make-believe.  It's like we're stuck at some fucked-up party that the central banks are throwing and we're forced to pay for the drinks- theirs!  It won't be long before the stench of vomit results in the party being over.

RECISION's picture

Well, we have been waiting over three years already...

How long is "wont be long" do you reckon?

jaffa's picture

Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets. Thanks.
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