No Credit Crunch in the Euro Area?

Eurointelligence this moring reports the following from the Frankfurter Allgemeine:

“A cooldown yes, but no recession for the euro area

In its monthly economic report, Frankfurter Allgemeine writes that an increasingly probable US recession would affect the euro area economy, but would not lead to a recession over here. One argument is the still continued credit boom in the euro, according to the latest data. “

Here are the latest data on money and credit growth in the Euroarea: http://www.haver.com/COMMENT/080128a.htm

These data do not show any credit crunch.

However, there is an interesting parallel to the U.S. worth watching. In a report published on January 14, Richard Iley from BNP Paribas analyzed the U.S. flow of funds data and found that total credit market borrowing in Q3 actually increased in the middle of the credit crunch! http://www.rgemonitor.com/redir.php?clid=8328&sid=1&tgid=10000&cid=237219

When decomposing the data he found that the increase in borrowing was actually driven by financial institutions. Since their traditional funding in the capital markets and in the asset-backed commercial paper market was effectively shut down, they borrowed everything from Government Sponsored enterprises (GSE) and Federal Home Loan Banks. Since these institutions are not capitalized for these elevated transaction volumes, the Fed and other banks introduced the TAF lending facility. Recently released data show that the TAF is effectively funding the banking sectors’ required reserves against collateral that can’t be sold in the markets. http://www.federalreserve.gov/releases/h3/Current/

How does it look in Europe?

The ECB Monthly Bulletin January 2008 has the following Box 1 on page 15:

RECENT LIQUIDITY OPERATIONS AND THEIR IMPACT ON MONETARY AGGREGATES

image002_15.gif

image004_12.gif

Money market conditions were effectively restored with the ECB’s lending interventions but only at the cost of heavy borrowing from the banks (see the declining reserve surplus in Chart B) with the ECB’s lending facility against collateral that is not viable in the capital markets, as is the case in the U.S. Moreover, the ECB explains with regard to Chart C that the unsecured lending rate EURIBOR, which is the relevant lending rate base for households and firms remains high.

“Higher market rates at term maturities in the unsecured interbank market will, to a certain extent, influence the cost of bank funding, thus potentially also affecting the cost of bank borrowing for fi rms and households. A rise in borrowing costs is likely to have a dampening impact on loans and thus has the potential to influence monetary dynamics.”

One particular example is the case of Spain, whose banks issued a record €53bn of mortgage-backed securities and asset-backed securities in Q4, none of which were sold in the open market but directly placed with the ECB for repo lending operations. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/28/bcnspain128.xml&CMP=ILC-mostviewedbox

In view of these data, the proper place to look whether a credit crunch is underway or not is the Bank Lending Survey. http://www.ecb.eu/stats/pdf/blssurvey_200801.pdf

“The results of the January 2008 bank lending survey referring to the fourth quarter of 2007 indicate a further increase in the net tightening of credit standards for loans to enterprises (from 31% in the third quarter of 2007 to 41% in the fourth quarter of 2007). The sharp tightening reflects the deterioration of financial market conditions since the start of the financial turmoil last summer and a worsening of banks’ situation. For the fourth quarter of 2007, banks also reported a further net tightening of credit standards for loans to households for house purchase (from 12% in the third quarter of 2007 to 21% in the fourth quarter of 2007). In addition, credit standards for consumer credit and other lending to households were tightened (from -3% in the third quarter of 2007 to 10% in the fourth quarter of 2007), compared with a net easing of credit standards in the previous quarter.”

Let’s also keep in mind that European corporations rely more on bank funding than their Anglo-Saxon peers, so the credit crunch is worth watching carefully.

5 Responses to "No Credit Crunch in the Euro Area?"

  1. Sebastian Dullien   January 30, 2008 at 1:01 pm

    Elisa, a nice analysis.However, I would read the data slightly more positively than you.First, money market conditions have increasingly improved since the beginning of the year, a period which is not shown in the ECB’s graph. If you take a look at the 3-months-EURIBOR graph at the Bundesbank’s website (see the graph at http://www.dullien.net/extern/corel.jpg ) , you see that the rate is back below 4.4 percent, only around 10 basis points above what it was before the crisis hit in August 2007.Second, if you take a more detailed look at the bank lending survey, the tightening seems most likely to come from a general more sceptical outlook for the general economic situation and the housing market. A real credit crunch would look slightly different: You would expect the bank’s capital and balance sheet considerations to dominate. In addition, the vast majority of banks in that survey claim that the financial market turmoil had basically no influence on their credit standards.Europe for sure will feel some of the downturn in the US. However, I still see a reasonable probability that Europe can avoid recession.

  2. eparisi   January 30, 2008 at 4:54 pm

    Sebastian, thanks for your comments. I hope you are right. Meanwhile, the signals from the corporate bond markets are not encouraging either despite some recent respite, and the situation could deteriorate again on any piece of bad news (such as UBS $11bn loss in Q4, the largest in any bank since turmoil started.)

  3. eparisi   January 30, 2008 at 6:26 pm

    P.S.: an attentive reader pointed the Fed reserve data out to us a few days ago. Thanks Gail!

  4. blissedoutcold   October 21, 2008 at 12:01 am

    The TRUTH shall set US free,and then there Mother Nature will be making her margin calls – after these messages, we’ll be right back!

  5. Guest   November 22, 2008 at 2:42 pm

    There she isAnd I am foreverHauntedThere I am notForever loved.