ECB medicine failing to hit real economy

Data published by the European Central Bank today shows that its massive liquidity injection efforts are failing to be passed through to the real economy, according to research from Danske Bank.

The Danish bank’s analysts said that the ECB did manage to stop a credit contraction in 2011 by its actions to introduce the LTRO, “but it is also evident that so far the ECB lending has not been passed on to the real economy.”

“Looking forward we expect credit to remain stable in the first half of 2012 and foresee a moderate credit expansion in the second half of 2012, which should help to support a pick-up in euro area growth,” the bank said in a research note.

“However, we expect to see substantial country divergence. Lending in Germany may pick-up significantly this year as the economy gains further momentum while lending in several peripheral countries may well continue to contract.”

The data is contained in the ECB’s bank lending survey, which points to a combination of factors such as the continued sovereign debt crisis, concerns over economic activity and the rising cost of funds in response to regulatory moves all contributing to the credit tightening last year. Danske notes that the European Banking Authority call for a higher 9% Core Tier 1 ratio alone was the equivalent of reducing risk weighted assets by €1.25trn, or almost 6% of all lending to households and non-financial corporations.

“Lending to households and to a lesser extent lending to non-financial corporations did indeed start to contract in October 2011. The reduction in total lending to non-financial corporations gathered pace in December. From September to December 2011 banks cut lending to households and non-financial corporations by about €75bn.”

“The big question is of course to what extent further lending reductions will be used to fulfil the capital requirements. If the pace of reduction is maintained we should expect banks to cut lending by another €150bn in H1 12.”

The ECB’s three-year LTRO operation has undoubtedly helped, Danske said. The roughly €1trn borrowed by Europe’s banks this way is feeding through by some measures, such as that for money growth or ‘M3′, particularly in France, Spain and the Netherlands, Danske said. Effectively this means that the ECB has avoided a credit crunch, but that there is still a lag in place before that additional money is passed on to end borrowers.

“We expect that banks will keep credit standards tight in H1 12, but see room for some easing of credit standards and a moderate credit expansion on the other side of the 30 June deadline set by EBA. This is an important ingredient in our euro area macro outlook where we see growth picking up during the year and in particular in the second half of the year.”

“We expect the important country divergence to continue. Lending in Germany may pick-up significantly this year as the economy gains further momentum (keep in mind that 460 out of 800 banks using LTRO II were German), while lending in Spain may well continue to contract as the housing market continues to deteriorate and the economy remains in recession.”


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