Monday, February 27, 2012

Lender of last resort for financial sector but not yet for economy

The latest monetary data for the Eurozone reflect some revival of lending, particularly to households, but the risk of a credit crunch still prevails. In January, M3 growth accelerated to 2.5% YoY, from 2.0% in December. At the same time, growth in loans to household and companies increased slightly to 1.1% YoY, from 1.0% in December. The monthly flows of loans to the private sector show that loans to households increased significantly in January, while loans to non-financial corporations dropped slightly, adding to the sharp drop in December.

Today’s numbers have been awaited eagerly as they give a first impression of the impact of the ECB’s first 3-year LTRO on the Eurozone economy. The positive psychological impact on markets and, particularly, government bond markets has been obvious from the start. The economic impact, however, remains still limited. As a consequence, this week’s second 3-year LTRO is clearly not redundant.

Estimates on the possible take-up at this week’s second 3-year LTRO are almost countless and according to a recent Reuters poll range between 200bn and 1000bn euro. Our own colleagues from rate and credit strategy have come up with estimates ranging between 440bn and 600bn euro. The wide range of estimates shows that it is very hard to get a grip on the opposing drivers of liquidity demand. On the one hand, plenty of excess liquidity, the stigma factor and negative carry-trade options for core Eurozone banks with home bias would argue for a limited take-up. On the other hand, however, relaxed collateral rules by seven national central banks, continued tension in the financial sector as indicated by Moody’s decision to put 114 European banks on review for downgrade and demand from car manufacturers for ECB funding all argue for a large take-up. In a couple of days, the number guessing game will be over.

Officially, the ECB’s non-standard measures’ main purpose throughout the crisis has been to tackle and prevent a possible credit crunch in the Eurozone. Even if the ECB has managed to restore calm in markets, being the lender of last resort for the financial system, its job as the economy’s lender of last resort is not done yet.

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