Eurozone nears Japan-style trap as money and credit contract again

The Telegraph ^ | 10/25/2012 | Ambrose Evans-Pritchard

[bruinbirdman]

All key measures of the eurozone money supply contracted in September and private credit fell at an accelerating pace, dashing hopes of a quick recovery from recession.

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

[arrogantsob]

The old Liquidity Trap opens up again.