Earlier in the week we discussed the dismal downward spiral that bank lending was implying for the euro-zone [4]. Today, we get further confirmation that the credit creation business in Europe, the very life-blood of the pump-at-all-costs Keynesian economic world in which our super-inflated debt economies now live, is dead in the water. Not only did M3 come out well below expectations at 2.6% YoY (vs 3% Exp.) but loans to the private sector remain drastically in the red.
[5]
The fragmentation across the individual nations is dramatic, indicating that even if Draghi were to cut rates next week it will be largely ineffective - given overnight rates are already close to zero and demand appears absolutely non-existent (due to balance sheet destruction).
[6]
Of course, that is the entire point of the central bank, to lower the cost of funding to a point where it's impossible to refuse (force feed supply) but with the LTRO repayments an explicit tightening, banks delevering, and collateralizable assets in very short supply, Draghi will have to look long and hard to find the right "extraordinary measure" to solve this vicious spiral.
Of course he has discussed the direct-to-SME loan program but with demand languid, collateral quality non-existent and the risks implicit in taking that dross on to the ECB balance sheet, we suspect there will be a lot of push back.