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Friday, October 26, 2012 12:29 PM

Credit Crunch in Europe; Eurozone Lending Sinking Fast; Money Supply Contracts

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A collapse in demand for credit is underway in Europe. Bank lending is down sharply and the decline has "surprised the experts".

I wasn't surprised in the least, but nonetheless, please consider Lending in the euro zone is declining fast, courtesy of Google translate (slightly modified by Mish) from Die Welt.

In the crisis-hit euro zone, fears rise of a credit crunch. The sharp decline in bank loans to companies surprised even the experts.

The sum of bank loans to companies and households in the euro zone shrank more than expected in September. Bank lending in comparison to the same month last year shrank by 0.8 percent, said the European Central Bank (ECB). Analysts had expected a decline of only 0.6 percent.

The lending to companies fell month on month by 20 billion euros after it was dropped in August only to six billion euros. In many countries recessionary demand for loans is naturally low.

"At least in some euro area countries, the capital constraints affect the supply of credit from the banks to the real economy," said Commerzbank expert Michael Schubert. The complaints about the business in France over high hurdles in lending would have declined in recent months, is slow. A similar picture is apparent in Italy.
Credit Crunch or No Demand?

The article bills this event as a "credit crunch". I would define a credit crunch as demand for credit that is not met. Here, I primarily see falling demand. Why businesses should want to expand in this environment is beyond me, and indeed they don't.

So if there is no reason for businesses to expand, especially if Germany and France have hit the skids. And both countries have hit the skids (as expected, at least by me) and as noted in Eurozone Downturn Deepens, PMI at 40-Month Low; Manufacturing Weakness in Germany; Considerable Service and Manufacturing Contraction in France.

So why the surprise? The answer is most of these guys cannot think.

Money Supply Contracts at Sharp Pace

Ambrose Evans-Pritchard reports Eurozone nears Japan-style trap as money and credit contract again.
Data from the European Central Bank show that the tentative rebound in the money supply over the summer may have stalled again in September.

The broad M3 gauge -- watched by experts as an early warning signal for the economy a year or so ahead -- shrank by €30bn and is now down by €143bn since April. This is highly unusual.

"The message is clear," said Lars Christensen from Danske Bank. "The ECB needs to stop obsessing about fiscal issues and do real quantitative easing (QE) if it wants to stop the eurozone going the way of Japan."

Loans to firms and households fell 1.3pc as banks continue to shrink their balance sheet to meet tougher rules. Private bank lending has been falling almost continuously since April.

"This credit contraction is what happened in Japan in the early 1990 and we have to be careful not get into deflationary spiral," said Prof Richard Werner from Southampton University, a Japan expert. "They to need to launch true QE or an expansion in broad credit creation, and it cant be done easily."
Message is Clear

Lars Christensen from Danske Bank says the "message is clear" and proposes QE as the solution. Prof Richard Werner from Southampton University, an alleged "Japan expert" made similar statements.

What's clear is both are spouting complete economic nonsense and both are devoid of any knowledge of history. Japan launched various monetary and fiscal stimulus programs over the course of 20+ years and it got them nothing but a massive pile of debt to show for it.

Please note that eurozone excess reserves are piling up to the tune of €770 billion as of September according to the Wall Street Journal report The ECB, ‘Sterilization’ and Money Supply. It's nearly €900 billion now. Lovely.

QE is not going to stimulate the demand for credit. It didn't in Japan, it didn't in the US, it hasn't so far in Europe.

More QE in Europe won't spur lending either, but it might give gold a nice lift.

Mike "Mish" Shedlock

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