Tag Archive for Ecb

Euro area’s persistent credit contraction – Sober Look

In spite of a number of positive economic indicators out of the Eurozone (see example), credit growth remains the area’s Achilles’ heel. The latest private sector loan growth aggregate from the ECB shows an annual decline of 1.8% (adjusted for sales and securitization – see press release). Here is what it looks like for the area’s households and corporations.

In spite of currency disadvantage, Germany competes on brand – Sober Look

Germany’s trade figures continue to surprise to the upside. The latest merchandise trade number came in at €18.9bn, while according to Econoday, economists were expecting €15.5bn.

Source: Econoday

The question of course is how does Germany do this given that it is competing directly with Japan in global markets. And Japan has had one key advantage – a weakening currency, which makes its product cheaper. The chart below shows the value of the euro in terms of yen (EUR/JPY), with the euro now at recent high against the yen.


Is there a different product mix between Germany and Japan? Certainly. But according to CIBC the product overlap with Japan is the highest for Germany vs. other Eurozone nations. Machinery, electronics and cars represent a substantial component of both nations’ exports.

Source: CIBC

So how does Germany compete so successfully in spite of this currency disadvantage? The answer seems to be that Germany can compete on brand strength even at higher prices.

CIBC: – The [euro] strength against the yen will persist, a challenge largely for German exporters as they compete closely in areas such as autos and electronics. However, with many consumers prepared to pay a premium for German engineering, its exports are often less sensitive to price changes.

Indeed when compared with its Eurozone peers, German exporters boast the least price-sensitive merchandise. For example, a 10-20% higher price on a high-end German car is less likely to motivate someone to switch to a Japanese car – particularly in markets like China.

Source: CIBC

Going forward, German firms will be getting some tailwinds from Mario Draghi’s accommodative monetary policy. The ECB overnight rate is now at record low. That should limit the euro’s appreciation and provide some price stability for German exporters.


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Eurozone’s falling excess reserves – is another round of LTRO required? – Sober Look

The euro area banking system excess reserves are continuing to decline – touching the lowest level since 2011.

Just to put this in perspective, the chart below shows excess reserves in the US. With the Fed continuing to pump liquidity into the system, these swelled above $2.3 trillion last week – a new record.

The reason the Eurozone reserves are declining has to do with the area’s banks gradually repaying what they have borrowed from the Eurosystem via MRO and LTRO loans.

Source: ECB

Some economists view this decline in excess reserves as an indication of tighter monetary conditions in the Eurozone. They point to weak consumer credit growth and a severe contraction in corporate lending.

YoY change in loans to euro area households (source: ECB)

YoY change in loans to euro area companies (source: ECB)

A few economists have called for Mario Draghi to offer up another round of LTRO lending or lower the rates on MRO (short-term) loans in order to boost excess reserves. The thought is for the ECB to follow the Fed’s and the BOJ’s lead at the October meeting and expand its balance sheet.

Such action however is unlikely at the next meeting. Certainly if these declining excess reserves push up rates, the ECB will have to act. But the central bank does not have the Fed’s dual mandate and is not as focused on the Eurozone’s dangerously high unemployment levels. Instead Draghi will concentrate on forward guidance of maintaining low overnight rates for the foreseeable future. The ECB will want to keep the LTRO tool in its back-pocket in case the crisis flares up again. After all, there is a nonzero risk of the German Constitutional Court ruling against the OMT program (ECB’s commitment to directly purchase government bonds of periphery nations). Other issues, such as political uncertainty in Italy (see post), could potentially reignite the crisis as well.

For now Draghi will want to see if the Eurozone’s credit markets can begin to “heal” themselves. The members of the Governing Council are following a number of business surveys which seem to point to stabilization in the area periphery nations.

Source: Econoday

If however lending volumes do not show a visible improvement in the next few months, another LTRO program could be in the works at a later date.

Bloomberg: – Frederik Ducrozet, an economist at Credit Agricole CIB in Paris says an LTRO is unlikely until December. The central bank could boost its forward guidance by putting a definite end date for loans at a particular cost, by issuing an LTRO with a fixed rate, he said. The previous loans were charged at the average of the ECB benchmark over the maturity.

‘‘A properly-designed LTRO would have the potential to kill several birds with one stone by enhancing forward guidance, keeping excess liquidity higher for longer, and further boosting the use of collateral from small businesses,’’ Ducrozet said.

ECB officials including Executive Board member Benoit Coeure have played down the short-term likelihood of a new round of long-term loans, saying that while it remained an option, it hasn’t been specifically discussed. The ECB’s Governing Council convenes in Paris on Oct. 2 for its monthly rate-setting meeting.


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The Eurozone is on the verge of repeating Japan’s lost decade- Sober Look

Recently the IMF made it clear that the current euro area leadership needs to address its ongoing banking problems. The Eurozone’s banks are continuing to deleverage, with total loan balances to euro area residents now at the lowest level in 5 years. What makes the situation even more troubling is that many Eurozone banks banks are repeating the Japanese experience of the 90s. They are carrying poor quality and often deteriorating assets on their balance sheets, refusing to take writedowns that will require recapitalization.