8:00PM BST 25 Oct 2012
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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 narrow M1 gauge watched for signals of activity six months head has held up better but also contracted in September, falling by €16bn.
"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.
The ECB’s €1 trillion lending blitz to banks last Winter helped shore up Spain, Italy, and other sovereign states but has not filtered through into private lending as originally hoped.
"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."
The disappointing ECB data came as the International Monetary Fund said Portugal faces "increasingly difficult" choices and may have to push through another round of austerity cuts.
The IMF approved the next €1.5bn tranche of rescue loans for Portugal but warned that "adjustment fatigue" has become a serious problem. "Risks to the attainment of the programme’s objectives have increased markedly. Social and political resistance to adjustment has heightened," it said.
Portugal’s public debt will reach 124pc of GDP next year. Economists say there are echoes of the debacle in Greece, where austerity eroded the tax base so badly that it became impossible to meet the deficit targets. The country then had to cut deeper, causing a vicious circle.
The eurozone's credit contraction helps explain the shift in rhetoric on Wednesday by the ECB’s president, Mario Draghi, who told the Bundestag that Euroland risks sliding into deflation.
He said the ECB’s plan for unlimited bond purchases -- known as Outright Monetary Transactions (OMTs) -- was necessary to stop a destructive dynamic taking hold in the crisis-stricken economies. "The greater risk to price stability is currently falling prices in some euro-area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it," he said.
The IMF has warned that much of the apparent inflation in southern Europe is a statistical illusion, largely due to rises in VAT and other consumption taxes. The EU institutions do not adjust for this, a fact that has been widely criticised by outside economists.
The Fund warned that the underlying pressures are deflationary, and this process can be hard to reverse once it sets in. Officials in Frankfurt say Mr Draghi has been fully aware of this for a long time but has only recently won over the ECB council’s to his point of view.
"Draghi’s comments are a very big deal. We are clearly heading towards QE," said Marchel Alexandrovich from Jefferies Fixed Income.
There was some good news in the ECB data. While the eurozone core is sliding into a deeper downturn, the periphery is stabilizing and Italy’s monetary figures are springing back to life.
Simon Ward from Henderson Global Investors said the current 270 basis point spread in 10-year yields between Italy and France can no longer be justified, an argument also made by HSBC.
Italy will have a large primary budget surplus next year. Most of the country’s belt-tightening will be out of the way by mid-2013. It has already done much of the hard work that lies ahead in France. "Italy is a much better credit than people realize," said Andrew Roberts from RBS.
Spain is a different story but even there bank deposits have begun to rise again as the Draghi bond plan eliminates the risk of the eurozone break-up in the foreseeable future.
The Bank of Spain said deposits jumped €15bn in September, though the system has still haemorrhaged €153bn over the last year.
Inigo Fernandez de Mesa, the treasury’s secretary-general, said foreign investors have bought 50pc to 80pc of Spain’s debt at the most recent auctions. The country is now 95pc funded through the year, greatly reducing the need for a full rescue before Christmas.
The great unknown is how long the Draghi balm can keep soothing markets. It is unclear whether the ECB really has the political licence to buy Spanish bonds on the scale needed to eliminate all doubts about Spain’s solvency.
Nomura warns that if the ECB repeats the sort of pin-prick bond purchases of past interventions, it will make matters worse. The effect will be to push private investors down the credit ladder, without restoring confidence -- the mistake made with Greece, Ireland, and Portugal before they crashed into full rescues.
The ECB has said it will take equal status -- pari passu -- in Spain and Italy but refuses to do so in Greece right now where the matter is being put to the test, arguing that this would amount to monetary financing of deficits and be illegal. Investors may hang back from Club Med debt until this is nailed down beyond any doubt.
Sovereign debt strategist Nicholas Spiro said Euroland is in a comfortable impasse. "A deceptive calm has descended over eurozone debt markets. The "Draghi effect" is sufficiently potent for some in the markets to claim that the eurozone crisis is nearing its end."
"We believe such claims are premature and belie the risks associated with the bond-buying programme, to say nothing of the deep-rooted political, economic and institutional problems that continue to bedevil the eurozone."
The twin problems of bail-out fatigue in the North and austerity fatigue in the South are slowly getting worse, not better. "We believe the biggest risks in Europe are now in the political arena," he said.
"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."
The disappointing ECB data came as the International Monetary Fund said Portugal faces "increasingly difficult" choices and may have to push through another round of austerity cuts.
The IMF approved the next €1.5bn tranche of rescue loans for Portugal but warned that "adjustment fatigue" has become a serious problem. "Risks to the attainment of the programme’s objectives have increased markedly. Social and political resistance to adjustment has heightened," it said.
Portugal’s public debt will reach 124pc of GDP next year. Economists say there are echoes of the debacle in Greece, where austerity eroded the tax base so badly that it became impossible to meet the deficit targets. The country then had to cut deeper, causing a vicious circle.
The eurozone's credit contraction helps explain the shift in rhetoric on Wednesday by the ECB’s president, Mario Draghi, who told the Bundestag that Euroland risks sliding into deflation.
He said the ECB’s plan for unlimited bond purchases -- known as Outright Monetary Transactions (OMTs) -- was necessary to stop a destructive dynamic taking hold in the crisis-stricken economies. "The greater risk to price stability is currently falling prices in some euro-area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it," he said.
The IMF has warned that much of the apparent inflation in southern Europe is a statistical illusion, largely due to rises in VAT and other consumption taxes. The EU institutions do not adjust for this, a fact that has been widely criticised by outside economists.
The Fund warned that the underlying pressures are deflationary, and this process can be hard to reverse once it sets in. Officials in Frankfurt say Mr Draghi has been fully aware of this for a long time but has only recently won over the ECB council’s to his point of view.
"Draghi’s comments are a very big deal. We are clearly heading towards QE," said Marchel Alexandrovich from Jefferies Fixed Income.
There was some good news in the ECB data. While the eurozone core is sliding into a deeper downturn, the periphery is stabilizing and Italy’s monetary figures are springing back to life.
Simon Ward from Henderson Global Investors said the current 270 basis point spread in 10-year yields between Italy and France can no longer be justified, an argument also made by HSBC.
Italy will have a large primary budget surplus next year. Most of the country’s belt-tightening will be out of the way by mid-2013. It has already done much of the hard work that lies ahead in France. "Italy is a much better credit than people realize," said Andrew Roberts from RBS.
Spain is a different story but even there bank deposits have begun to rise again as the Draghi bond plan eliminates the risk of the eurozone break-up in the foreseeable future.
The Bank of Spain said deposits jumped €15bn in September, though the system has still haemorrhaged €153bn over the last year.
Inigo Fernandez de Mesa, the treasury’s secretary-general, said foreign investors have bought 50pc to 80pc of Spain’s debt at the most recent auctions. The country is now 95pc funded through the year, greatly reducing the need for a full rescue before Christmas.
The great unknown is how long the Draghi balm can keep soothing markets. It is unclear whether the ECB really has the political licence to buy Spanish bonds on the scale needed to eliminate all doubts about Spain’s solvency.
Nomura warns that if the ECB repeats the sort of pin-prick bond purchases of past interventions, it will make matters worse. The effect will be to push private investors down the credit ladder, without restoring confidence -- the mistake made with Greece, Ireland, and Portugal before they crashed into full rescues.
The ECB has said it will take equal status -- pari passu -- in Spain and Italy but refuses to do so in Greece right now where the matter is being put to the test, arguing that this would amount to monetary financing of deficits and be illegal. Investors may hang back from Club Med debt until this is nailed down beyond any doubt.
Sovereign debt strategist Nicholas Spiro said Euroland is in a comfortable impasse. "A deceptive calm has descended over eurozone debt markets. The "Draghi effect" is sufficiently potent for some in the markets to claim that the eurozone crisis is nearing its end."
"We believe such claims are premature and belie the risks associated with the bond-buying programme, to say nothing of the deep-rooted political, economic and institutional problems that continue to bedevil the eurozone."
The twin problems of bail-out fatigue in the North and austerity fatigue in the South are slowly getting worse, not better. "We believe the biggest risks in Europe are now in the political arena," he said.
