The ECB released (pdf) its February report on monetary developments in the euro area. This is an important report, since it will highlight whether or not the ECB’s LTRO is working, if the new liquidity is passing through to the real economy via new lending. On balance, it’s probably too early to tell, since there are long lags in monetary policy – however, early signs are not good for the real economy.
Ostensibly, the ECB LTRO did its job, as interbank credit has re-emerged in aggregate. Repo credit increased 4.2% over the year in February – this followed an 11.5% annual surge in January. Furthermore, short-term debt holdings jumped at a 21.3% annual pace. Banks and sovereigns have seen relief in the short-term credit markets, a product of long-term funding from the ECB.
But credit availability to the broader economy is more challenged. The chart below illustrates the working-day and seasonally adjusted lending by Monetary Financial Institutions (MFIs) to the household and non-financial corporate sectors. I use the 3-month/3-month average growth rate to illustrate the credit impetus over the LTRO period. In the three months ending in February, household lending fell 0.18% compared with the average spanning September through November 2011. The drop in quarterly lending did slow, but remains in decline. Loans to non-financial corporations fell a larger 0.82% in the three months ending in February. For non-financial corporations, the pace of decline quickened since the three months ending in January.
(Click charts to expand)
Across the euro area, the charts below illustrate the contribution to annual growth in euro area credit across the 17 EMU economies by sector: household (and nonprofit) and non-financial corporate. The usual suspects are seeing large declines in household and non-financial corporate lending, including Spain, Portugal, Greece, and Ireland. France is the bright spot across both sectors, contributing a large share (multiples of its GDP share) to household and non-financial corporate lending.
Chart Note: the Charts below illustrate the country-level contributions to the annual growth rate of euro area Household and non-financial corporate loans in February 2012.
Household lending The contribution to annual EA credit growth from Irish households (consumer plus mortgages) has been negative for 40 consecutive months, or 13 consecutive months in Spain. Portuguese household loans dragged annual EA loan growth consecutively since September. The credit impetus is very negative in consumer and mortgage lending for these economies. A positive point is that German consumers are borrowing for credit consumption and home buying. German household lending contributed 0.32% to annual EA loan growth in February – this compares favorably with the 0.17% average contribution spanning 2004-2006.
Non-financial corporate lending By this metric the Spanish business sector is effectively imploding, as Spanish non-financial corporate lending dragged the pace of annual EA lending by 1.1% in February. The contribution from Spanish corporate lending has been negative for 32 months, and the pace of contraction has picked up some speed since September 2011 on an annual contribution basis.
The credit impetus remains reasonably strong in the core countries, at least on a year/year basis (with stark exception of the Dutch household sector). And to some extent, the drop-off in credit to the periphery was to be expected. However, with the domestic drag in periphery credit markets already under way, and limited upside potential to global demand for exports, one questions whether or not the ECB waited too long (given the long lags in monetary policy).
Megan Greene highlights the risks to the Euro area. With these risks in mind, restrictive fiscal policy amid deteriorating labor markets makes the euro area extremely vulnerable to external shocks.