Connect More Dots

by Andrew Stuttaford

Via the Wall Street Journal:

LONDON (Dow Jones)–Confidence in the euro zone economy fell a second straight month in April, adding to evidence it won’t grow until the second half of the year at best, a survey showed Thursday.

The overall economic sentiment indicator for the 17 nations using the euro fell to 92.8 in April, the lowest in over a year from 94.5 in March, European Commission data showed. That’s weaker than the 94.2 forecast in a Dow Jones survey of economists last week. There were sharp declines in overall consumer, industrial and services confidence. All forward-looking gauges retreated.

And then there was this not entirely unrelated item from Ambrose Evans-Pritchard the other day:

The long-feared credit crunch has mutated instead into a collapse in DEMAND for loans. Households and firms are comatose, or scared stiff, in a string of countries. Demand for housing loans fell 70pc in Portugal, 44pc in Italy, and 42pc in the Netherlands in the first quarter of 2012. Enterprise loans fell 38pc in Italy. The survey took place in late March and early April, and therefore includes the second of Mario Draghi’s €1 trillion liquidity infusion (LTRO).

The ECB said net demand for loans had fallen “to a significantly lower level than had been expected in the fourth quarter of 2011, with the decline driven in particular by a further sharp drop in financing needs for fixed investment.” Demand fell 43pc for household loans, and 30pc for non-bank firms.

Mr Draghi told MEPs today that his three-year loans had at least averted a horrendous crunch. “Our LTROs have been quite timely and successful. I think buying time is not a minor achievement.” He is certainly right about that. The mess he inherited from the Merkel/Sarkozy expropriations of bondholders in Greece, and the Trichet/Stark tightening of monetary policy was calamitous…

… It is true that banks have slowed the pace of credit tightening, but they are nevertheless still tightening. “A banking crisis remains very much in play for much of the region,” said David Owen from Jefferies Fixed Income.

The credit squeeze is entirely predictable – and was widely predicted – given that banks must raise their core Tier 1 capital ratios to 9pc by July to meet EU rules, or face nationalisation. (The pro-cyclical folly of this beggars belief: by all means impose higher buffers, but not during a recession, and not by letting banks slash their balance sheets. The US at least forced its banks to raise capital, an entirely different policy since it does not lead to a lending crunch.)

The IMF said last week that Europe’s banks would slash their balance sheets by €2 trillion – or 7pc – by next year. This amounts to an economic shock. The Fund said deleveraging on this scale at a time of sharp fiscal tightening risks a “bad equilibrium”.

Read the whole thing. Mr Evans-Pritchard being Mr. Evans-Pritchard, it only gets gloomier.

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