Eurozone credit crunch fears on M3 money contraction
Europe is at mounting risk of a fresh credit crunch after the eurozone money supply contracted for a second month in November and the volume of private loans began to shrink.
Credit to households and business on a month-to-month basis it has been flat for months and is now shrinking.
By Ambrose Evans-Pritchard
3:52PM GMT 29 Dec 2011
Data released by the European Central Bank shows that M3 money figures tracked by experts as a leading indicator for the economy have turned negative since August, signalling almost certain recession over coming months for the region as a whole.
“The message of these numbers is that the eurozone faces a bleak 2012, with inflation falling rapidly,” said Tim Congdon from International Monetary Research. “There is a desperate need to restore growth to the banking system and boost the quantity of money.”
Credit to households and business is still growing at 1pc on an annual basis, but on a month-to-month basis it has been flat for months and is now shrinking. It is broadly the same picture for the “broad” M3 money supply, which includes cash and a wide range of accounts and forms a key pillar of the ECB’s monetary policy.
Simon Ward from Henderson Global Investors said the ECB’s “narrow” M1 money figures – tracked for clues on shorter-term spending patterns – show a drastic divergence between the North and South of the eurozone. “Parts of the core may avoid recession but there is no light at the end of the tunnel for the periphery. Real M1 deposits in Greece and Portugal have been falling at an annual rate of roughly 20pc over the last six months,” he said.
The overall picture for both the money supply and private credit is as contractionary as in late 2008 after the Lehman crisis. ECB president Mario Draghi has reversed gears dramatically since taking charge in October, cutting interest rates twice to 1pc and providing €489bn in credit to banks for three years to prop up EMU debt markets.
Mr Draghi hopes to ease the pain as banks scramble to meet tougher core Tier I capital ratios of 9pc by June. The risk is that lenders comply by slashing loans and dumping assets rather than raising fresh capital in a hostile market. The Basel-based Global Stability Board said banks would have to cut their balance sheets by €2.5 trillion if they opt to deleverage by cutting assets, threatening a economic shock.
The one good sign is that eurozone banks became buyers of government bonds in November after four months of relentless selling. The shift follows the ECB’s policy pirouette in October and is a tentative sign that Mr Draghi’s new strategy may be bearing fruit.