Austerity continues to kill European credit

A couple of points of note from Europe over the last 24 hours.

Firstly Mario Draghi, the ECB president,  visited the Bundestag in an attempt to allay fears that the ECB’s outright monetary transactions (OMT) program would have the detrimental long term outcome that many Germans are concerned about, namely hyper-inflation:

The European Central Bank President Mario Draghi made a robust defence of his bond-buying plan to ease the eurozone’s debt crisis, telling German lawmakers their fears of illegal funding of governments or stoking inflation are misplaced.

A smiling Draghi entered the lion’s den of the Bundestag lower house for a two-hour grilling behind closed doors on Wednesday on the ECB’s Outright Monetary Transactions (OMT) programme, which the German central bank has denounced as tantamount to printing money to finance governments.

Rebutting the main objections point by point, Draghi said, according to an opening statement released by the ECB: “First, OMTs will not lead to disguised financing of governments.

“Second, OMTs will not compromise the independence of the ECB… Third, OMTs will not create excessive risks for euro area taxpayers… Fourth, OMTs will not lead to inflation.

German politicians appear to have taken Mr Draghi’s words in their stride but I’m unsure if he swayed anyone with his speech. I personally disagree outright with his first point. The fact that he is standing in a nation parliament delivering a speech to explain himself negates most of point two, game theory will do the rest. I agree with point 3 , but only because the risk already exists independent of the ECB,  and point 4 is highly dependent on how you define inflation. As I said in a previous post on the OMT:

There are obviously side effects of these programs …. it should be noted that these operations lower the respective currency relative to other currencies and tend to lift equity and commodity prices in the short term as the additional liquidity finds a new home. The overall outcome of these side effects is inflationary pressures in food and energy that potentially decrease consumption and therefore reduce overall economic activity.

So these operations are likely to have inflationary outcomes on particular financial assets and commodities, some of which may have a flow-on inflationary effects on consumer pricing. Does that mean I think the OMT program will lead to broad-based inflation across the Eurozone? No. But that is because the pre-requisite for implementation is the enactment of deflationary fiscal policy which, in broad terms will counter these effects. The latest report on monetary developments from the ECB  highlights this point:

.. the annual growth rate of credit extended to the private sector stood at -1.3% in September, compared with -1.2% in the previousmonth. Among the components of credit to the private sector, the annual growth rate of loans was more negative at -0.8% in September, from -0.6% in the previous month (adjusted for loan sales and securitisation, the rate was more negative at -0.4%, from -0.2% in the previous month).
The annual growth rate of loans to households stood at 0.1% in September, compared with 0.2% in August (adjusted for loan sales and securitisation, the rate stood at 0.9%, unchanged from the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, stood at 0.7% in September, compared with 0.8% in the previous month. The annual growth rate of loans to non-financial corporations was more negative at -1.4% in September, from -0.7% in the previous month (adjusted for loan sales and securitisation, the rate was more negative at -1.2% in September, from -0.5% in the previousmonth). Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) was less negative at -2.0% in September, from -3.5% in the previous month.

So credit growth either continues to slow or is negative across the Eurozone’s private sector because credit is mostly demand, not supply, driven and economic retrenchment significantly lowers said demand. So the overall outcome of these dual operations is a bias towards the “inflation in all you need, deflation in all you own” effect. Not quite hyperinflation, but painful enough for the average citizen.

Turning to Greece and the polictical games continue:

Greece says it has been granted an extra two years to meet austerity targets. The EU and IMF deny it. According to press reports, Athens needs an extra 20 billion euros in aid. It is difficult to determine exactly what might come next for the country, but commentators say it is clear that Europe is at a crossroads.

According to leaked draft documents ( below ) Greece’s creditors have agreed to give the country two more years because the existing program has failed to meet the targets. These documents claims 2016 is now the target year for a 4.5% primary surplus and the extra time will allow for a slower fiscal consolidation. Obviously more time means more money and the estimates are running between €16 and €30 billion in additional funding to extend the program while meeting the new obligations specified by the Trokia.

The IMF is denying all of this while the German finance minister has stated no decision will be made until after the final troika report , but that hasn’t stopped Greece’s finance minister claiming the deal is already done.  Under the circumstances it is very hard not to believe Greece has the upper-hand here, as I said back in late August:

No matter what your ideology on the situation it is now clear that Greece is unable and/or unwilling to meet the demands of northern Europe and that giving the country even more debt in hope of return is pure delusion. Mr Draghi recently made comments that the Euro was ‘irreversible’, but if that is the case then the rest of Europe has no choice but to continue to roll-over funding through Greece or accept a new round of defaults. German and Finland at least appear to be once again weighing up which one of those options would be less painful.

And so it goes. Full MOU document below.


Latest posts by __ADAM__ (see all)


  1. Why are the Germans so suspicious of a system the Fed and US government have been participating in for years? Don’t they ever look across the Atlantic?

  2. INFLATION ? In the current deflationary environment ? The germans just fear to pick up the tab of irresponsible southern european spending.