Eurozone credit contraction continues

By Sober Look

Private loan balances in the euro area continue to decline. Last month’s drop of 2.2% from the previous year was worse than had been expected by economists.


The area’s banks are undergoing a sharp deleveraging exercise with balance sheets shrinking due to both loan write-downs and extraordinarily weak lending. Maturing loans are not being fully replaced with new credit. Pressure from the ECB’s 2014 stress testing of banks (similar to what the Fed just completed) is also discouraging credit expansion.

Reuters: – Lending to households and firms in the euro zone shrank further in February and money supply growth remained subdued, adding to the European Central Bank’s list of concerns ahead of its policy meeting next week.

The ECB’s health check of the euro zone’s largest banks’ balance sheets before it takes over banking supervision in November is exacerbating the situation, with lenders reluctant to take on more risk and trying to slim their loan books instead.

Bank balance sheets declined by around 20 percentage points of gross domestic product last year, partly in anticipation of the health check, ECB President Mario Draghi said on Tuesday.

And more is to come this year.

UniCredit, for example, posted a record 14 billion-euro loss this month due to huge writedowns on bad loans and past acquisitions as it moved to clean up its balance sheet.

The ECB welcomed the move and encouraged other banks to not to wait with any corrective measures until the review’s results are released in October.

Some have pointed to a “glimmer of hope” in the household lending balances which showed a small uptick in credit expansion.

Eurozone household loan growth (YoY); Source: ECB

The increase however came from a slightly slower decline in consumer credit (credit cards, auto loans, etc.), which continues to fall (year-on-year change is firmly in the red). This contraction to a large extent is driven by weak demand.

Eurozone consumer credit growth (YoY); Source: ECB (apologies for the different time scale)

Furthermore, growth in mortgage loans remains anemic, making this household lending uptick less of a reason to celebrate.

Eurozone mortgage loan growth (YoY); Source: ECB



Moreover, the area’s corporate loan balances are continuing to see sharp declines – down 3.1% from the same time last year. Weak demand remains the culprit here as well.

Eurozone corporate loan growth (YoY); Source: ECB

In February Mario Draghi blamed credit weakness on banks’ “window dressing” exercise of trimming balance sheets before year-end financial reporting.

Draghi: – “One would not rule out a certain behavior by the banks that would like to present their best data by the end of 2013, which means that this is going to affect credit flows, which means that we may have different figures in the coming weeks …”

It would be interesting to see what Mr. Draghi will come up with this time to explain the ongoing contraction in euro area’s private credit.


Sober Look is a no-hype financial markets/macro blog that typically relies on data analysis, primary sources, and original materials. We keep it concise, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include financial markets, banking, asset management, risk management, derivatives, global economy, policy, and regulation, with the emphasis on finance education. Follow him on his blog or twitter.