The ECB is on Mars

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness

Overnight the president of the European Central Bank, Mario Draghi, gave a speech to the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament. The speech was not particularly out of line with what Mr Draghi usually says, such as:

Available indicators for the first quarter of 2012 broadly confirm a stabilisation in economic activity at a low level. Latest developments in survey data are mixed, highlighting prevailing uncertainty. Looking ahead, growth should be supported by foreign demand, the very low short-term interest rates as well as our non-standard measures. At the same time, downside risks relate in particular to a renewed intensification of tensions in euro area sovereign debt markets and their potential spillover to the real economy. Further increases in commodity prices may also hamper economic activity.

This is the same speech lead-in we have been hearing since Mario Draghi took over the helm of the ECB from Jean-Claude Trichet. Given recent PMI data much of this statements appears to be completely disconnected from the reality of what is happening in Europe, but this isn’t the first time I have noted Mr Draghi’s apparent delusion.

Mario Draghi went on to state that he thought Eurozone inflation would be stable because:

… the monetary analysis, in particular the subdued pace of underlying money growth, confirms the prospect of price developments remaining in line with price stability over the policy-relevant horizon. Money and credit data up to February point to a stabilisation of financial conditions. At the same time, the demand for credit remains weak in the light of still subdued economic activity and the continuing process of balance sheet adjustment in non-financial sectors.

I consider it of crucial importance that banks strengthen their resilience further, including by retaining earnings and by retaining bonus payments. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of their funding channels.

Next came the 3 -year LTRO program:

The LTROs contributed to alleviate these very difficult funding conditions. Banks could satisfy their additional liquidity needs, which is reflected by a net liquidity injection of around €520 billion, taking into account the shifting of liquidity out of other operations. Moreover, banks have benefited from more certainty about their medium-term funding due to the longer maturity of the new operations.

I understand that you are particularly interested in the transmission of the LTROs to the real economy. This is indeed a crucial point: ensuring that the ECB’s monetary policy continues to be transmitted effectively to the real economy was a key motivation of the Governing Council decision. It is encouraging to observe that a very large number of small banks have participated in the two LTROs. Small banks are best placed to refinance the real economy, in particular small- and medium-sized firms which are the biggest generator of employment in the economy.

We are confident that central bank liquidity has come very close to the real economy. Of course, this does not mean that this will by itself boost lending to firms and households. First, the central bank cannot interfere with the banks’ use of the liquidity since that is their business decision. But we trust that they will use it to refinance the real economy because that is the role of a banking system. Second, the future evolution of credit growth will depend essentially on demand. In the current environment, this is likely to remain subdued. Thus, money and credit growth may stay weak for some time before the overall economic situation improves. The Bank Lending Survey, with some new information about financing conditions will be published at 10 am this morning.

So basically Mr Draghi is saying that one of the major reasons for implementing the LTRO was to ensure that monetary policy flowed into the real economy, but acknowledges that he really can’t control what the banks will do with ECB loans. He then suggests that the real problem is lack of demand stemming from economic weakness.

Next Mr Draghi talked about the monetary union’s failings:

Of course, divergences of economic developments are a normal feature within a monetary union. Such divergences can also be observed on the other side of the Atlantic. But they should not become of a persistent and structural nature.

Unfortunately, very large imbalances were allowed to accumulate over recent years in several European countries. These imbalances stemmed from different sources: insufficient fiscal discipline, financial excesses, failure to implement structural reforms especially, but not exclusively, in the labour and product markets and significant competitiveness losses. All of this necessitates urgent and resolute adjustment.

Clearly, it cannot be the responsibility of the ECB to address these imbalances. From the perspective of monetary policy, our primary objective is to maintain price stability in the euro area as a whole. For that purpose, the ECB continuously monitors all relevant information from the countries and various business sectors of the euro area. But the monetary policy stance of the ECB has to be focused on the entire euro area. It cannot address divergences among individual euro area countries.

That is the task of governments: they must undertake determined policy actions to address major weaknesses in the fiscal, financial and structural domains. We note that progress is being made in many countries. These measures need to be complemented by growth-enhancing structural reforms to facilitate entrepreneurial activities, the start-up of new firms and job creation. Here, governments should be more ambitious.

At the European level, there has been substantial progress towards reinforcing the economic governance framework. We have seen a strengthening of the fiscal rules of the Stability and Growth Pact and the introduction of the Fiscal Compact, about which we spoke in the Parliament last December. And we are implementing the new focus on correcting macroeconomic imbalances.

And here we see the contradictions.

Firstly, Mario Draghi states that it wouldn’t be right for the ECB to dictate to banks what they should be doing while his institution bails them out, yet feels free dictate policy to national governments.

Secondly, his reasoning for the failure of the LTRO to transmit monetary policy to the economy is that there is a lack of demand for credit, yet he is calling for further fiscal tightening on economies that are already shrinking.

Thirdly, he states that bank balance-sheets are the crucial component in stabilising the crisis, yet in an environment of subdued credit demand and struggling economies he expects banks to somehow increase their capital via lending to the private sector.

Many of these contradictions are highly visible in the Spanish banking system:

Mortgage lending by Spanish banks had their largest annual drop in more than six years in February – coming in at essentially half of what they were a year earlier. There are all kinds of reasons for this, not the least being that large numbers of Spaniards are out of work and house prices are still tumbling with at least one estimate being that they remain as much as 30 percent overvalued.

But given that Spanish lenders were among the biggest taker of the ECB’s largesse (officially known as LTROs, a name only a central banker’s mother could love) the lack of trickle down is less than bracing.

But it isn’t just Spain where this can be witnessed. As mentioned in the speech the ECB released the latest Eurozone banking survey overnight (available below). This is a document I have been waiting on for some time in order to get a better understanding of the effects of the LTRO program.

On the positive side the survey states that there has been a broad decline in credit tightening stemming from the banks access to liquidity and lower funding costs:

According to the April 2012 BLS, the net tightening of banks’ credit standards on loans to non-financial corporations (NFCs) dropped markedly in the first quarter of 2012, to 9%, from 35% in the preceding quarter. This drop is much more pronounced than anticipated by survey participants at the time of the previous survey round (when it was expected to be 25%).

Euro area banks also reported a significant decline in the net tightening of credit standards on loans to households for house purchase. The net percentage of banks reporting a tightening of credit standards on mortgage loans fell by more than expected in the previous survey, standing at 17% in the first quarter of 2012, down from 29% in last quarter of 2011.

The net tightening of credit standards for consumer credit reported by euro area banks also declined more strongly than previously expected, to 5% in the first quarter of 2012, compared with 13% in the preceding quarter. A substantial reduction in pressures emerging from cost of funds and balance sheet constraints was reported also in this category.

On the negative side this has in no way effected the strong downwards trend in lending to the private sector:

In the first quarter of 2012, the net demand for loans to NFCs dropped significantly (-30% in the first quarter of 2012, compared with -5% in the fourth quarter of 2011. By contrast, for the second quarter of 2012, banks expect a rise in demand for corporate loans. The fall in net demand for loans in the first quarter of 2012 was driven in particular by a further sharp drop in the financing needs of firms for fixed investment (-36% in the first quarter of 2012, compared with -20% in the fourth quarter of 2011).

Euro area banks also reported a strong further contraction in the demand for housing loans in the first quarter of the year (-43% in net terms in the first quarter of 2012, from -27% in the preceding quarter. The decline was mainly on account of a deterioration in housing market prospects (-31%, compared with -27% in last quarter of 2011) and consumer confidence (-37%, compared with -34% in the previous quarter), as well as a decline in non-housing-related consumption.

Net demand for consumer credit fell more strongly than expected in the first quarter of 2012, standing at – 26% according to euro area banks, compared with -16% in the previous survey round. This decline was mainly explained by the negative impact on loan demand from internal financing of households via savings (-13% in the first quarter of 2012, compared with -3% in the preceding quarter), lower household spending on durable goods and a decrease in consumer confidence (with both household spending on durable goods and consumer confidence falling to -28% in the first quarter 2012, from -20% in the last quarter of 2011).

As I have explained recently in the context of Spain, collapsing credit demand ultimately leads to a loss of banking capital, which is the exact opposite of what the LTRO program was set up to achieve. Interestingly, as the charts below show, banks seem to think that there will be a slowing of the fall in credit demand in the next quarter across all markets:

Given, as I said earlier this week, European fiscal policy is setting up Europe up for perpetual recession, I have no idea why the banks think this will occur. Overnight the UK joined Spain in technical recession. This lending data clearly suggests they won’t be the last.

Full banking survey report below.

Euro Area Bank Lending Survey April 2012

Print Friendly, PDF & Email


  1. chitown2020

    They are just pretending its not one giant global insolvent mess. They created too much debt because they all have serious gambling problems. There is only one correction that will ever work. Delete them.

  2. Maju

    Not “in Mars” but “in Goldman Sachs”, different planet: same spacing out. Monti and Draghi are old boys from GS and GS is the one directing this show since it manipulated the accounts of Greece and bailed itself out when Paulson (another GS man) was the chief financier of Washington D.C.

    It’s of course ethically deplorable but, in a sense, it’s also admirable how a bunch of smartasses have managed to gain such a brutal control of the global economy and are now happily and consciously destroying it for their own power and wealth goals.

    The boundaries of the camarilla I wouldn’t dare to define but the core is the old manager-partners of Goldman Sachs: they run the show and surely they reap the benefits for the greatest part. Although it’s more in the end a matter of power, after all wealth is just a tool for power.

    This is just another concentration of wealth and power in the hands of the same old cliqué. And the GS old boys are the organization (or one of the main organizations) in charge of securing this institutional mega-heist.

    Only a full fledged revolutionary process can stop them. Well, that or natural exhaustion of the economy by mere mismanagement (or both together).

    1. Luciano

      Goldman Sachs…come on! When you see that Spain had, until recently, yearly current account deficits totalling 10% of the GNP you know that this was bound to happen.

  3. InternationalMonetary

    “So basically Mr Draghi is saying that one of the major reasons for implementing the LTRO was to ensure that monetary policy flowed into the real economy, but acknowledges that he really can’t control what the banks will do with ECB loans.”

    The commercial banks have the final say on monetary policy. If they want to expand lending it will only be in order to fulfil their objectives of profit. Therefore lending may enter the economy in an imbalances manner as in previous business cycles.

    Why do private banks get to create money and run monetary policy? Monetary policy should be conducted in a balanced and even manner and the central bank should deal directly with the public with no dependance on commercial banks.

    1. Literary Critic

      When you get down to it, the current system uses private banks as “intermediaries” whose job it is to determine who is credit worthy.

      Bottom line is central banks do not want 7 billion potential customers.

    2. Samuel Conner

      re: “Why do private banks get to create money and run monetary policy?”

      Private banks don’t “run monetary policy” since they cannot create the reserves they need to fund their payments. They get reserves by borrowing from other banks or in the last resort from the Central Bank, which sets monetary policy through its target interest rate for overnight interbank lending of reserves.

      Banks are permitted to create credit as this is reckoned to be socially useful to finance investment, company working capital, and some consumption. It works well if the loans are well underwritten and well secured (two things that were abandoned during the securitization fiasco). The problem is not bank lending per se, but the regulatory environment, which has become way too permissive.

      1. Samuel Conner

        I’ll also note as a technical amendment to the above that banks can also get reserves from depositors, who are a cheaper source of reserves than the overnight market or the CB discount window.

      2. Leverage

        Given that 80% of credit is for mortgages and 10% for consumption is very questionable we need banks with such weight in the economies and that TBTF.

        Corporation can issue their own paper, and the world is flood with money from decades of deficit spending (more than 12 trillion USD of net savings by private sector!), so venture capital and investment funds can fund new corporations.

        Small business could be funded by small local/regional banks or private-public partnership credit entities (or exclusively public, like state banks ala North Dakota).

        Having banks done what they have done can hardly be done worse than governments, and if they want to be market dealers, work on securization, proprietary trading etc. they should not be treated as banks.

        It’s like in Japan, were most banks could have disappear in the last 20 years and nothing would have changed really with governments injecting money via deficit spending and strong corporate and household balance sheets. Instead they decided to keep zombis around.

  4. Ignacio

    And what about foreign demand as the only source to promote growth in the eurrozone? It makes me think on that old rhetoric about prosperity in the EU treaties.

    Guillotines is what we need to apply to those fu@king Bas#ards.

    If you believe my commentary is rude just think what may happen the day when we stop making rude commentaries and proceed with the next step against policymakers.

    1. LeonovaBalletRusse

      Draghi speaks for the Coup Meisters of 1% EU “Government of/by/for Finance.” How it Works:

      Joseph Vogl: “Sovereignty Effects” (INET Conference Berlin, April 12, 2012, Panel: Which Way Forward?) —

      Can’t say we weren’t warned. See Vogl reference: Gabriel Naude: “Considerations politiques sur les Coups d’Etats” (1639).

  5. Renodino

    Free markets yearn to be free to spend tax payers money as they see fit. Mostly on bonuses.

  6. docG

    If Draghi is on Mars, then you’re on Saturn. Austerity is certainly not the answer. But neither are the manipulations of the monetary system sought by so many of his critics. For the ECB to print money in the volume required by the current situation would, at best, just be another version of kicking the can down the road. At worst, it could lead to a huge disaster. Inflation would only be the beginning, as there would be a total breakdown of confidence in the entire financial system. (Actually that might be a good thing in the long run, but in the interim it would be a catastrophe.)

    1. steelhead23

      I’ll take door number 3, Bob. Why not just let the banks die, let the broke countries default, and break up the EZ? Its as easy as 1-2-3.

  7. Jim

    But there is no “European fiscal policy” because there is no United States of Europe.

    Those of you who oppose Draghi, at least put forth viable solutions to the problem. You want the ECB to monetize peripheral debt? At least propose what the peripheral nations are willing to give up to Germany in exchange for a United States of Europe. German taught in all schools? German command of the military in each nation?

    Two solutions to crisis.

    (i) The dissolution of the Eurozone

    (ii) The United States of Europe.

    I believe the optimal solution is (i).

    But if (ii) is embraced, the peripheral nations must be ready to cede substantial sovereignty to the northern European nations.

    P.S. Imagine the impact of inflation on German voters. 40% of Germans own their homes, while 82% of Italians do.

    1. Jackrabbit

      (iii) Periphery countries adopt US Dollar. Result: Euro strenghtens a bit so periphery countries get a 30% (estimate) devaluation verses the “core.”

      Once countries return to better shape, the all rejoin the Euro.

      Much less disruptive than returning to 20 different currencies and a block of nations with a common goal (re-entry to Euro) would have more weight in negotiations for what the Euro/Europe should look like when they return.

      Welcome any thoughts.

      1. LeonovaBalletRusse

        This would be seen as the “American Anschluss Visible.”

        The Financial Coup d’Etat did not a complete “european union” make. The Coup Meisters knew that the Maastricht Treaty was an insufficient basis upon which to build a legitimate “Unites States of Europe” of Napoleon’s Dream. The key question is: “Did they care, when they thought they could force the issue in time?” Their covert purpose was “Global 1% DNA Lebensraum” within the EuroCurrency-controlled political/economic sphere. Their means of militant conquest was/is Financial Occupation and Extraction by the 1% through Strategic Coups d’Etats, following the IMF “shock doctrine” model of “efficiency.”

        Oh, this efficient “method” exceeds in subtle wickedness the NAZI regime’s by far. Anent “efficiency” Euro-style in the past, recall “La Chute” by Albert Camus.

        Have a nice day.

      2. Jackrabbit

        Oh just after I wrote this it occurred to me that the periphery countries could do this on their own without the dollar.

        I realize that it is a sensitive issue. Don’t mean to offend. I get a few minutes to look at NC during the day and ‘jumping in’ can lead to inadvertent foot-in-mouth problems.

        Still, it seems that some kind of collective action by the periphery, coordinated with the ‘core’ might help to manage the necessary adjustments.

        1. Jackrabbit

          Also note that my thinking was that any such solution would be temporary.

          The issue I raise is this: If one or more countries were to leave the Euro, should they reintroduce their former currency(s) or use a single currency for use by all who leave or may leave the Euro.

          (I got into trouble because it occured to me that the resulting Dollar-Euro difference seems close to what PIIGS might need to resolve their economic troubles.)

  8. Lafayette

    European fiscal policy is setting up Europe up for perpetual recession

    More nonsense from Down Under.

    Why must DE use such polemics to get his point across? Because he has no other convincing argument?

    What perpetual recession? Never hear of a Business Cycle? And all cycles turn, the only constant in time being change. DE is impatient with the ECB – well so are many others. But just because the ECB’s remit is not identical to that of the FRB does not mean that it cannot function property, which DE purports.

    The effort in the EU is to maintain at all costs the Euro. To do otherwise would mean a gradual drift back to national currencies that existed in pre-Euro days. DE was not obviously around during that time. The European currency system at that time was a drag on economic activity within a Common Market that had rather good underlying economic factors. (Meaning expansion of intra-CM trade, the major part of all CM member country exports.)

    And it seems that people like DE haven’t the foggiest notion of what economic activity was like in that period of wildly fluctuating national currencies – which impacted negatively on intra-CM trade. And prompted CM-members to beggar-thy-neighbor by unilateral currency devaluations – thus paving the way for a rush to the bottom in a deflationary spiral.

    During which as well, to stabilize the currency system and thus promote intra-Common Market trade, the European currency “snake” was innovated. And which worked miserably.

    If the EU has any destiny whatsoever, it is to benefit from its demographic entity of more than 500 million consumers with a propensity to spend. That entity can only be expressed with a common currency, just as it exists in the US.

    Is it too much to ask of an Australian, way Down Under, to understand such simple economic theory?

  9. Fiver

    I note Wall Street has been ever so pleased with the ECB’s (and Fed/BoJ/BoE et al) last 6 months’ work – outsized gains piled nearly as high as the mountain of analysts/pundits’ searing reviews of European policy.

    It appears a (false) “sea change” similar to what I’ve suggested has been happening in the US is unfolding in Europe. It essentially consists of putting back into the tool box for future use the “crazy right”, which has done such an excellent job of diverting attention away from and largely discrediting any serious challenge to the globalized bankster/Central Bank financial system by vomiting all over the rest of the policy arena in more ways than anyone thought possible. Hollande in. Obama in. Merkel gone.

    “Progressives” or “liberals” and “mainstream” punditry will get behind this big time, wanting nothing more passionately than to return to 1999 or 2007 – surely the best of all worlds, because there it was possible to pretend that huge, permanent masses of deprived people did not exist in “developed” nations, or, heaven forbid, next door. But nobody will be so enthused as Wall Street next year as it aims to fire up a mushroom bubble for their very own Mr. President. I would expect something of a bullshit “green” variety – BS because it’s not intended to seriously address the issue anymore than MBS were designed to provide housing.

    But to clinch, Wall Street will need to remind everyone at least once this year that there are 2 kinds of money:

    1) “Hard money” is the money Wall Street crystallizes from the flow.

    2) “Soft money” are the tailings that belong to everyone else.

Comments are closed.