On November 7, 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 then 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.
The European Central Bank reported that money supply growth (M3) in the euro area decelerated further in October, dropping to an annual rate of 1.4% – the slowest pace of increase in two years – well below the ECB’s 4.5% reference target. The flow of credit to the private sector dropped by 1.7% yoy (adjusted for securitization and sales), down from 1.6% in September.
While the credit impulse to households remains low but positive (0.1% yoy), the fall of credit to corporates (-3.7% yoy) confirms that we are heading towards a creditless recovery, where investment will not be an engine of growth. Of note, the picture is once again one of fragmentation. While the French corporate sector proved rather resilient to credit crunch, the total amount of loans to corporates plunged by 5.7% yoy in Italy, 6.6% in Portugal, and 19.3% in Spain.
Buzzzz, wrong. In a Keynesian world there is no such thing as a creditless recovery: something Goldman’s operative in the ECB knows well, and why the ECB may truly use the nuclear option, and opt for negative deposit rates probably after a conditional LTRO or another 15 bps repo rate cut, but potentially as soon in the next month or two, as it has tried everything else, aside from outright QE, which however would mostly benefit Germany’s asset holders and do nothing to stimulate credit growth (see the US for 5 years worth of proof).
As for the European fragmentation in the loan creation department, our condolences to Spain because no amount of employment data falsification or Rajoy propaganda can undo the devastation left from an ongoing 20% crash in credit creation.
And the punchline:
In conclusion, even SocGen is now pessimistic that anything the ECB does will have much of an impact on the credit implosion that is Europe: “Yet, it is not clear to us how a movement in overnight deposits would be such as to stimulate investment. What we rather see 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.”
How surprising: “everyone” as usual has zero understanding of how money and credit creation truly work, and just regurgitates whatever the guy next door has said. Alas, that will not help Draghi in his fight against monetary zombocalypse.
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