As frequent readers will recall, 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. As a reminder, it was as recently as September when we found [14]that "Mario Draghi's Nightmare Gets Worse" because "European Loans Declined At Record Rate." To our complete lack of surprise, when a few hours ago the ECB released the latest monetary [15]and credit creation update for the month of September, it showed... no change. Or rather, while loans to the private sector are at all time record lows, that other metric which Draghi at least has some direct control over (since he obviously can't control the amount of confidence in the system aside from threats of brute force), M3, just had its lowest pace of increase since January 2012.
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But here's the kicker: while the US at least has the Fed to step in and forcefully push credit into the private sector void as it has been doing every day since Lehman, in Europe, with the ECB's balance sheet actively declining, the continent is well, on its own to fend against the monetary zombies horde shown below.
SocGen agrees:
The European Central Bank reported that money supply growth (M3) in the euro area decelerated further in September, dropping to an annual rate of 2.1% – the slowest pace of increase since January 2012 – well below the ECB’s 4.5% target. Looking at credit, the picture is once again one of fragmentation. While the French corporate sector proved rather resilient to credit crunch, the total amount of credit to corporates plunged by 4.9%yoy in Italy, 7% in Portugal, and an alarming 19.9% in Spain. Undoubtedly, this weakness in monetary and credit developments will add pressure on the ECB, which could decide to ease financial conditions further. But this will not be sufficient.
Our view is that a rate cut would require an additional weakening in either the growth or the inflation outlook.
The combination of currency in circulation and overnight deposits (M1) increased by only €6bn in September, after the average €38bn jumps recorded over the July/August time span. On an annual basis, the growth of M1 continued to slow. Indeed, the closely-followed aggregate stood 6.6% above year-ago levels in September, after 6.8% in August and 7.1% in July.
On that matter, the ECB recently communicated on the fact that the solid increase in the M1 aggregate seen since the beginning of the year would ultimately foster a recovery in credit – and Investment – even though the overall money supply growth (M3) was decelerating.
Yet, it is not clear to us how a movement in overnight deposits would be such as to stimulate investment. What we rather believe is that the flow of credit remains negative, which suggests that the strong recovery in investment everyone expects is unlikely to happen for, at least, six to nine more months.
Not only is it not clear to SocGen, worst of all it is not clear to Mario Draghi, which is why his nightmares will only get worse and worse, as loan creation collapses further, as non-performing loans accumulate, and as Europe's credit-money zombies finally escape their cages and start biting chunks of meat off of (Europe's unemployed) people.
In the meantime, 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. He will fail.