One of our favorite themes in the past year has been watching Mario "Whatever it takes" Draghi reel powerless before the relentless contraction in Eurozone credit. Most recently, in November we reported that "when the ECB announced a "surprising" rate cut, 67 out of 70 economists who never saw it coming, were shocked. We were not. As we observed ten days prior, Europe had just seen the latest month of record low private sector loan growth in history. Or rather contraction. Back than we said that "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."
We concluded: "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." Less than two weeks later he did just that. The problem, as the ECB reported today, is that not only did M3 decline once more, to 1.4% or the slowest pace in over 2 years and well below the ECB's 4.5% reference growth value, but more importantly lending to companies and households shrank 2.1% in October - the biggest drop on record! Draghi's monetary zombies are winning."
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Fast forward to today, when the ECB just announced the latest set of undead monetary statistics for November. To nobody's surprise, even though M3 posted the tiniest of possible annual increases, rising from 1.4% to 1.5% (3% below the ECB's 4.5% reference value which it considers consistent with its price stability mandate), loan creation to the private sector declined once again, this time dumping to -2.3% from a revised -2.2%. As the WSJ reports what we have said for the past year, "The deepening decline increases pressure on the central bank to embark on further measures to stimulate lending, analysts said."
By the numbers: in November lending to households declined by 3 billion euros ($4.1 billion) reversing the €3 billion increase in October, while lending to firms fell by €13 billion, following a €15 billion drop in the previous month. Loans to firms were down by 3.9% on the year.
What does it mean for the future of ECB actions? The WSJ, citing the chief economist at IHS Global Insight in London said that "he expects the ECB to stand pat at its next meeting on Jan. 9, he thinks it will take more action early in 2014, "most likely" as another longer-term loan. It is "highly possible" that a future loan would be "tailored specifically toward bank lending."
Or, looking at the way the EUR is dumping this morning, the ECB may once again shock everyone and do much more than this action, which is already conventionally accepted, and not only take rates even lower but potentially engage in the first case of full blown QE. After all, following three failed SMP sterilizations, it is not as if even the ECB is pretending to be "sterilizing" its previous episode of QE.
While activity data in the Euro area have stabilised, we expect bank lending to the corporate sector to remain weak, reflecting a weak recovery, heightened credit risk aversion on the part of peripheral banks and continued balance sheet adjustment in the financial and non-financial sectors. The ECB's Asset Quality Review (AQR), based on banks' balance sheet as of end-December, might have contributed to weak bank lending in recent months.
That...or the cold winter weather of course. Cause there is always something to explain away central planning failure.
Finally those looking for the culprits for Europe's lending freeze, look no further than Italy...
... and, of course, a "recovering" Spain: