With growing concerns over deflation and very little room to move on interest rates, the May ECB meeting brought Euro Area credit trends back to the forefront of investors’ minds. As at March, total loans to the resident private sector were 2.2% lower than a year ago. This is not a one off: annual growth in total loans to the resident private sector has been negative for two years.
The disaggregated Monetary and Financial Institutions (MFI; i.e. European Banks) data for the Euro Area allows us to gain a better understanding of the underlying trends in credit provision, both with respect to the domicile of the banks writing the loans and also which sectors are putting the funds to work. (Note: unlike the reported aggregate headline, this data is not seasonally or working-day adjusted.)
The MFI data makes it clear that there has been a marked divergence in non-MFI, private-sector credit provision by country. The decline in private lending by Spanish banks has been particularly sharp and protracted, with a cumulative 24% rundown since end-2008. This is not particularly surprising given the impact the GFC and ensuing recession have had – bad loans make up over 13% of total Spanish loans. Lending by Italian and German banks has declined by a more modest (but still substantial) 4–5% from peak levels, respectively seen in 2011 and 2012. In stark contrast, French banks have continued to increase their stock of loans, with loan growth of 11% since end-2008, but nil over the past year.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.