Thursday, 26 September 2013

Euro Area Bank Credit Tumbles, M2 Money Supply Growth Slides Further

Base Money, or the monetary base, in the euro area increased slightly in August according to figures published today by the ECB. The base remains however significantly lower than the level reached in June last year as banks have been repaying part of the previous emergency funding (LTRO) from late 2011 payable within three years (here and here). On Monday, ECB president Draghi stated, according to Reuters, that "We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money market rates at a level which is warranted by our assessment of inflation in the medium-term". If the ECB was to make such a move then the base would increase accordingly as a result (assuming no repayments of the old emergency funding).

In terms of the Capital & Reserves to Total Assets ratio, Euro area bank balance sheets have strengthened since the "financial crisis", increasing from 6.48% in July 2008 to a record high 9.39% as of August this year. A rise in interest rates could naturally reverse this trend.


The M2 Money Supply in the euro area continued to expand in August. The year on year (YoY) growth rate has however headed in the other direction in recent months, falling from 4.8% in April to 3.8% in August, the lowest YoY growth rate since September last year. All the shorter term growth rates are lower than the 1 year growth rate further suggesting a slowing down in the M2 growth rate (e.g. the most recent 6 month annualised growth rate is 2.8%, see table below).

Bank Credit in the euro area continued to tumble in August, falling 3.8% compared to the same month last year and 1.2% on July. Never in the history of the Eurosystem, established 1 January 1999, has bank credit dropped this much on a year on year basis. As growth is negative, it means repayments of existing loans exceeds issuance of new ones. At €11.876 trillion, the current level of bank credit is the lowest since April 2010. Though loans to general government has dropped considerably quicker than for loans to Non-MFI (Non-Monetary Financial Insititions) during most of this year, the latter dropped 3.5% on last year in August - the sharpest YoY percentage fall ever recorded for Non-MFI loans.

The reduction in bank credit is also negatively affecting money supply growth as money is created when a new loan is granted. As there is currently net repayments of loans, this will reduce the money supply accordingly, ceteris paribus.

Although one can hardly argue there's been a credit boom  in the euro area since the previous boom ended in 2008, it would not be unexpected if the decline in bank credit in recent months negatively affected both the economy and the security markets during the coming weeks and months (see here for more on this).