How Spain Just Made Mario Draghi's Nightmare Worse

Yesterday, ahead of the monthly update from the ECB, we posted "What Keeps Mario Draghi Up At Night, And Why The European Depression Has A Ways To Go" in which we showed that not only has M3 in Europe terminally broken apart from bank lending to the Euroarea private sector, but that lending to European banks was growing at the slowest annual pace on record. Today, the ECB showed that Draghi's unpleasant dream is becoming a full-blown nightmare with M3 sliding from a 2.9% growth rate in May to just 2.3% in June, suggesting that whatever the ECB is (not) doing is not working and yet another stimulus round is imminent.

However, putting into question whether even such a stimulus would do anything, is the fact that actual private sector lending contracted even more, and in June declined from a previous record pace of -1.1% to a new record low of -1.6%. In other words, not only is Europe's Keynesian debt trap getting bigger by the month, but the European monetary plumbing system is completely and perhaps permanently fractured.

As long as the gray line continues to be below zero, and certainly as long as it continues to decline, one can kiss all propaganda of a European "recovery" goodbye.

Specifically, in the "loans to non-financial corporations" category, on a seasonally adjusted basis, lending declined by €12.8bn in June, following a €17.4bn contraction in May and a similar move in April. However, it was the loans to households which were the notable outlier, as lending fell by €5.1bn in June. This is only the second fall in loans to households since July 2012, and comes on the heels of a €7.7bn contraction in May. Not only are corporations deleveraging in Europe, but now, once again, households have joined the fray.

Finally, looking at the actual culprits by nation, one country stands out like a sore thumb. We will let readers spot which European nation is responsible for the accelerating European credit crunch on their own.

Indeed, despite Mariano Rajoy's urgent desperation to massage the economic data in Spain, propping up PMI at all costs and now unemployment, which in the second quarter declined from 27.2% to 26.3% due to a strong tourist season (even with 5.98 million people unemployed), what the credit data is showing is that the pain in Spain remains, and until credit creation is once more positive there is little hope for any sustained improvement in either Spain, or the entire continent. And this ignore the fact that even with the SAREB soaking up the bulk of bad loans in the country (offset by rising sovereign debt), NPLs continue to hit record monthly all time highs: something which means the Cyprus one time, "non-blueprint" will sooner or later be repeated by Madrid.


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