As anyone who has read our series on "Mario Draghi's Monetary Nightmare [10]" knows well, the biggest problem Europe faces is not inflation (or rather deflation according to its Keynesian voodoo priests)but loan creation: nearly 6 years after the Lehman collapse, the monetary transmission mechanism i.e., loan-funded growth in Europe continues to be abysmal, mostly due to lack of credit demand, which in turn means that any attempt by Draghi to unclog Europe's monetary pipeline via NIRP, QE, or what have you, is set to fail. It also explains why the latest TLTRO expansion by the ECB (if it ever actually takes place of course: recall Europe's OMT program still does not officially exist) has and will achieve nothing for the real economy but certainly has boosted carry trades into overdrive leading to record lows for all peripheral bond yields.
Alas, today's ECB update on Monetary Developments [11] in the Euro Area was as grim as always, with the all important series of Loans to the private sector sliding once again by 2.0% Y/Y, worse even than April's -1.8% contraction, driven by a €43 billion collapse in loans to households. This happened even as the now largely meaningless M3 rose by 1.0%, an increase to April's 0.7% Y/Y change.
In other words, Europe is in bad a shape as pretty much ever, and loan creation is just fractions above its all time low print of -2.3% from late 2013.
[12]
But that's just part of the story, the part that we have long said will not change until there is dramatic debt destruction in Europe, and until the trillion or so in bad loans parked at Europe's banks are somehow alleviated.
Where things get really messy is when one looks at the actual components of the contraction. As Goldman explains, "Euro area bank lending to non-financial corporations (NFCs) fell by €7.6bn in May, after a €6.3bn contraction in April. Lending rose in France and declined in Spain and Italy, while it was roughly unchanged in Germany. There was a significant decline in lending to households for house purchase related to sales and securitisation. Broad money growth rose from +0.7%yoy to +1.0%yoy, stronger than expected (Cons; +0.8%yoy)."
Lending to non-financial corporations, on a seasonally adjusted basis, declined by €7.6bn in May, after a €6.3bn fall in April. The decline was smaller (at €4.5bn) when adjusted for securitisations and sales and broadly similar to the April figure. While this is still clearly disappointing, the rate of decline in bank lending to NFCs has eased somewhat over the past year.
So far so good. But here is the punchline, and proof that anything the ECB can and will try to do, will be a complete disaster: Loans to households fell by €42.8bn (its largest decline on record), having risen by €5.1bn in April. This was mainly related to lending for house purchases (which do not count towards banks' allotment in the TLTRO) and reflects sales and securitisation (when adjusted for this, lending to households rose €3bn, similar to the April figure).
[13]
The decline (on the unadjusted figures) was located in France, the country which so far has avoided any of the market wrath associated with its disastrous economic policies.
[14]
It wasn't just France: by country, the largest decline in lending to NFCs occurred in Italy and Spain, where bank lending dynamics remain weak, with a further fall of €5.1bn and €3.0bn respectively (on our own seasonal adjustment). Lending volumes were roughly unchanged in Germany, while there was a €3.7bn rise in lending in France. The stock of loans outstanding has contracted by over 30% in Spain and by over 8% in Italy since July 2011.
[15]
In short, not only is Draghi's nightmare about to spillover into the real world - because a complete collapse in household loan formation in Europe's second "best" economy clearly spells out some nasty four letter words - but the ECB disaster is just waiting to unfold. It also means that as the ECB scrambles to figure out next steps, it will stop at nothing to prove that the BIS concerns about central banker idiocy were full deserved, and we expect Frankfurt to launch QE in the coming months even though European private sector clearly has no excess collateral which the ECB can monetize, considering the vast majority of debt parked at various European banks is already collateralized at the ECB as is.
Of course, it is only when one is cornered and has no way are the most idiotic decisions possible made. Which is why we can't wait for the ECB's reaction function to this latest abysmal data print, popcorn in hand.
