Europe’s recession has barely begun

The reserves from the ECB’s LTRO stage II operation are making their way back into the excess reserve facility at the ECB. The overnight holdings were at an all time record of €820.81bn. As I explained previously, this in itself isn’t a problem. In fact, unless the reserves are moving to some other non-commercial bank accounts at the ECB there is little other place they can go. However, what is the problem:

…is that the increasing use of the ECB’s marginal lending facility shows that not all of these parked reserves are actually “excess to market requirements”.

The statistics from last night show that for the last 3 days there is still €783 million being rolled over using the ECB’s margin lending facility. With €0.8trn technically available for interbank lending it is certainly a concern that there is at least one bank still having to lean on the ECB for overnight liquidity. Once again this suggests the ECB is still holding up zombie banks that other banks are unwilling to trade with.

On top of the LTRO outcomes I have been running two major risk themes on Europe under the current “plan” over the last few months. Firstly the major one:

Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking.

Secondly, on top of the obvious problems in Greece and Portugal, the “black cygnet” that is Spain:

.. Spain which I consider to be the major unrecognised problem. The country has seen its yields tumble since December on the back of the ECB’s 3-year LTRO but there hasn’t been anything in the economic metrics of the country to support such action. Spain has 23% unemployment and still rising, the banking system is under-capitalised and still has unknown exposure to the country’s housing market collapse.  On top of that the rising unemployment rates is pushing up bad loans in the banking system to 7.4%, a 17-year high, and is still rising.

You can read more about my expected outcomes for Europe here, but in short, my base case is that the fiscal compact will never actually be implemented because member nations will look to Greece and Portugal and quickly realise it is economic suicide to attempt to deleverage the government sector of a non-export competitive euro-bound nation at a time when the private sector has no capacity to provide the required counter measures. That is,  increased production, dis-saving and/or additional debt.  As I noted yesterday, it appears Spain has already come to that conclusion and is now openly rebuking Europe’s call for it to meet unachievable deficit targets over the next financial period.

Overnight Markit Economics put out the latest PMI data for much of Europe which certainly highlights the themes I have been discussing.

From the weakening periphery, Spain:

Reversing the slower rates of decline seen in recent months, activity and new business both decreased at much sharper rates in February as the economic crisis in Spain showed no sign of abating. The fall in new orders at service providers was recorded in spite of further steep price discounting, while input costs remained unchanged.

The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – fell to 41.9 in February, much lower than the 46.1 recorded in January. The latest reading signalled the steepest rate of contraction since November 2011. Again, the economic crisis engulfing Spain was cited as a key factor behind the drop in activity.

From the middle, France:

Recent growth of French service sector output slowed to a halt in February, as activity levels stagnated. This was despite a marginal rise in new work intakes, with poor weather impeding output. Nonetheless, backlogs of work declined again, albeit only slightly. A mild increase in staffing levels was indicated. Future expectations strengthened markedly in February, albeit remaining below the long-run series trend. Meanwhile, strong competition led to a further reduction in output prices despite solid input cost inflation.

The seasonally adjusted final Markit France Services Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared with one month ago – registered 50.0, down from 52.3 in January. In line with the neutral threshold, the latest reading pointed to a flat level of activity on the month.

And from the outperforming Germany:

February data suggested that Germany’s service sector continued its steady upturn from the general weakness seen in the second half of 2011. This was highlighted by a further moderate rise in business activity, alongside the most marked increase in new work since last July. Service providers’ confidence in the year-ahead outlook also continued to improve, with around twice as many firms expecting an increase in activity as those that forecast a reduction. That said, jobs growth eased to its lowest since June 2010 and robust input cost inflation persisted in the service sector.

At 52.8 in February, down slightly from 53.7 in January, the final headline seasonally adjusted Germany Services Business Activity Index was above the 50.0 no-change value for the fifth consecutive month. The latest reading – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – was close to the long-run series average (53.1) and indicates a relatively solid rate of output expansion. Growth of business activity was recorded in four of the six sub-sectors monitored in February, with Renting & Business Activities and Transport & Storage the exceptions.

While the whole ship slowly sinks:


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  1. It will be interesting to see what happens Thursday in Europe on the Greek bailout. Will it go smoothly, but as we’re seen they are already talking of a third. What a plan…