Skip to comments.Demand for Credit in Europe Collapses
Posted on 04/29/2012 8:58:16 AM PDT by Kaslin
In a report on fixed income, David Owen, Chief European Financial Economist at Jefferies, notes that demand for credit in Europe has plunged.
Owen asks Is it the supply or demand for credit that matters?
25 April 2012
Perhaps the most memorable comment Mario Draghi made to the European Parliament today was the need for a euro area Growth Pact, but he did draw comfort from the results of the ECBs latest Bank Lending survey.
Draghi made reference to the fact that the balance of firms tightening credit conditions had fallen (from 35% in January to 9%). However, that it is not to say that credit conditions are actually easing, just that they are no longer tightening at the same rate as in January.
Not only are credit conditions still tightening, albeit at a slower rate, but importantly the ECBs latest Bank Lending survey shows credit demand collapsing. This is not something that Mario Draghi mentioned to the European Parliament at all.Europe Faces Japan Syndrome
In reference to the above chart, Ambrose Evans-Pritchard at The Telegraph says Europe faces Japan syndrome as credit demand implodes
Europe (minus Germany) looks more like post-bubble Japan each month.
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 Draghis €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.
This slump in loan demand is more or less what happened during Japans Lost Decade as Mr and Mrs Watanabe shunned debt. Zero interest rates did nothing. The Bank of Japan was "pushing on a string" (though it never really launched bond purchases with any serious determination).
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 Europes 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".
Or one analyst said, the LTRO lets northern banks dump their bond holdings onto Club Med banks. The renationalisation of the eurozone financial system goes a step further.
The LTRO "carry trade" is already revealing the sting in its tail in any case since the banks are by now underwater on a lot of bonds. What happens if and when they need to sell those bonds to cover debts falling due over the next year?
Until the ECB conducts monetary policy with proper energy, calls for "Growth Compacts" from governments amount to humbug. The ECB needs to do its own work.
We all know why it will not do so: because Hayekian romantics at the Bundesbank hold sway, and none of the other governors dare say boo. Live with the consequences.Live with the Consequences Indeed
Pritchard conveniently ignores the fact that Japan is struggling right now to "live with the consequences" of numerous misguided monetary and fiscal stimulus efforts over 20 years. Japan has debt-to-GDP exceeding 200% and little to show for it. And Japan now has to live with the consequences of numerous misguided QE and stimulus proposals.
Pritchard apparently wants more QE for Europe as if that would increase demand for credit.
Note that two rounds of QE did not increase the demand for credit in the US as per my post The Real Consumer Credit Story: Virtually No Recovery in Revolving Credit, No Recovery in Non-Revolving Credit.
Moreover, QE did not succeed in increasing the demand for credit in Japan over 20 years. So pray tell why would QE increase the demand for credit in Europe? More importantly, even if it did, would that be a good thing?
European banks are already over-leveraged and under-capitalized so how the hell is providing cheap credit going to possibly do anything good?
Would 0% interest rates help when they did not help Japan?
Pritchard Misses the Boat
Clearly Pritchard missed the boat on QE as well as the desirability of attempting to cram more credit down banks' throats when banks are over-leveraged and under-capitalized.
Everyone wants to do something "but not now". While there is immense merit to not hiking taxes in a recession as Brussels forced on Greece, Spain, and Portugal, work rule and pension changes are badly needed.
Pritchard's idea of raising capital instead of selling assets seems reasonable enough. However, nothing stops banks from doing that, at least in theory. Is practice another matter?
Giant Sucking Sound
William Wright discusses Tier-1 Capital requirements in A rough guide to surviving the great deleveraging of 2012
As if Basel III werent enough of a headache, big European banks face a deadline of June 30 from the European Banking Authority to increase their core Tier-1 capital ratios to 9%, equivalent to raising €115bn in equity.
In theory, banks can meet this by retaining profits, raising equity or shrinking assets. But with equity markets all but closed to banks and earnings falling, a crash diet to reduce their bloated balance sheets is the only realistic option.
Analysts expect that the great bank deleveraging of 2012 could see as much as $2 trillion to $3 trillion of assets trimmed from European banks balance sheets or about 5% of total assets with damaging consequences not only for the banking industry but for the fragile European economy.
Here is a rough guide to some of the inevitable consequences some deliberate, some unintended and some obscure of this deleveraging on the investment banking industry.
Death of profits, jobs and banks
The most obvious impact of deleveraging will be the devastation it will wreak on the profits of investment banks. In 2006, Goldman Sachs posted a return on equity of 33% and its core leverage assets divided by equity was 29 times. Fast forward to the first nine months of this year, and its return on equity was 3.7% with leverage of 14 times. Not because it has radically shrunk its balance sheet (yet) but because it has more than doubled its equity.
The same process will play out across the industry, where the combination of an increase in the cost of business driven by regulation is colliding with a downturn in activity. This will choke off profits, with JP Morgan forecasting that average ROE for the industry will fall to just 8% next year. Thats in line with research by Financial News that shows average pretax ROE in the first nine months of this year was 12% (or about 8% net).
Structurally lower profitability has already prompted banks such as Credit Suisse and UBS to slash their fixed income trading activities. While the thousands of job cuts seem harsh, they are often in the low single digits in terms of overall headcount. As more banks grasp the nettle in 2012, they will pull out of entire business lines, cutting 10% or 20% of their staff or pull out of investment banking altogether.Is That All Bad News?
Wright concludes that is not all bad news. I agree, but for some different reasons.
First Wright ...
The Promised Land
In all of this, there is some good news. For those banks that can survive the rigours of deleveraging without having to pull out of entire regions or businesses while retaining a profitable operation, there is a Promised Land on the other side. Overcapacity in the investment banking industry will be whittled away to leave a smaller number of bigger and (relatively) more profitable global banks whose scale will increasingly play to their advantage.
Bankers talk of JP Morgan, Deutsche Bank, Goldman Sachs and perhaps one other maybe Bank of America Merrill Lynch, Barclays Capital or Citi emerging stronger than ever. At the same time there will be a larger number of product and sector specialists, which will drop the me-too approach of the past decade.
In this new world, with a realistic price for risk and credit and less competition, margins can only go one way: up.Banks Should Be Banks, Not Hedge Funds
I do not believe that bigger is better and I am sick of the notion "too big to fail". Indeed, it most often means two things:
My own take is this:
The population is growing older all of the time. Thus there is no longer the pressure to Buy things just because. That means there is less need to borrow for major purchases because they have already done so.
There is also little or no need to move with the older populace. In Europe if you have a job its nearly impossible to be fired from it or laid-off. If you dont have a job then you are on the dole and therefore have no pressure on owning your residence as the welfare-state will provide that for you.
Public transportation is everywhere therefore only the rich need or can afford a new car and since they probably already own at least one and the quality of European autos is so high there is no need to buy a new one anytime soon if you already own one.
These are just a few of the things that come to mind but the bottom line is this: Why borrow money in uncertain times if your current needs and many of your future ones have already been met. Only the need for consumables will be constant, food, some clothing, Medical, Electricity, water, etc.
Maybe people are SICK AND TIRED of getting RIPPED OFF by the CREDITORS. I owe no one anything. Pay off my credit cards every month. I guess I am considered a “deadbeat.”
Is anyone still running a finance and economics ping list?
While true, to a point, your argument is overly simplistic.
It is not "nearly impossible" to be fired or laid off - it happens constantly here.
Ownership of Housing - Europeans are traditionally more "renters" than "owners", mistly due to the extremely high cost of ownership.
The Welfare state provides a modicum of security, but the worker who was used to a ceratin standard of living is certainly not going to be happy with less when unemployed - he will resort to the same tactics everyone tries ...
Public transportation is everywhere therefore only the rich need or can afford a new car ...
Oh please. Is 6% of income (after taxes) to much for a new car? Fact is, it is cheaper now than it EVER has been to own a new car ....
Why borrow money in uncertain times ...
EXACTLY. This is why neither Business nor the Consumer in Europe is borrowing! Few if any "set aside" for a rainy day and the idea of borrowing, when it is uncertain whether the payments can be made, is a luxury only governments can entertain.
>>Maybe people are SICK AND TIRED of getting RIPPED OFF by the CREDITORS. I owe no one anything. Pay off my credit cards every month. I guess I am considered a deadbeat.<<
I am not quite sure who would be calling you that. ALL reputable financial planners strongly recommend carrying no credit card debt (I do the same as you — I use CC’s as a convenience).
I do have a mortgage, only because 3.5% is so low it is almost free money. I could have bought my new house cash, but why? Better to be liquid.
I pay myself a “car payment” every month — by now I have more than enough to buy even a top of the line car with cash. But my 10 year old car has only 12,000 miles on it and I am pretty sure I can get another 10-15 years out of it.
People who took our second mortgages were a big part of the cause of the housing bust — your house should be an investment on where you live, not a financial instrument to finance a lifestyle beyond your means.
That is why being “upside down” on a mortgage should not matter if you plan on LIVING in your home (horrors!).
Vehicles are “upside down” the moment you drive them off the lot. That didn’t cause a car marker crash since as long as vehicles have financed (what, from Roman Chariot days?)
>>Is anyone still running a finance and economics ping list?<<
They couldn’t afford it...
Oh please. Is 6% of income (after taxes) to much for a new car? Fact is, it is cheaper now than it EVER has been to own a new car ....
This really interests me, can you give me some hard figures? I mean what is the income you are talking about and what is the price of the new car?
When the guy quit Goldman Sachs in March he said bankers refer to those who pay off their credit cards every year as “deadbeats”. Yeah I am a homeowner and my banker said if I ever needed a home equity loan..........I cut him off and said “Why would I do that?” He didn’t have an answer.
The focus for comment seems to be on credit for individuals.
It is my understanding that in Europe the business capitalization relies more on borrowed money than in the USA. If that is true, the credit demand decline is from businesses that are not borrowing because they are not selling and therefore not producing. ???
People keep using this along with the car analogy are missing the point. Getting widly upside down can seriously affect a person's entire livelyhood. If a need to relocate comes up, they CAN'T move as they literally cannot sell the house.
That means no job relocation and possible unemployment. Also, if I lost my job and now I need to relocate to get one, what do I do? That is why people are simply walking away from the houses, they have no choice left. No job, if they stay and lose their job or no job until they move.
Its great to be able to throw stones since you have all the cash you need to pay cash but everyone doesn't. My house is paid for so I am NOT refering to myself. Also the car analogy doesn't work as I will still need a car if if I move to a new location and most people don't get $50,000 unside down on a car.
This I agree with you 100%. I remember many here on FR before the crash advising people to do this saying that a house was an investment and to use it. I don't see them running their mouths on this subject anymore.
Where is this mythical place I can get a new car for 6% of my income. I make $35,000, so according to you I can get a new car for under $3,000.
My wife and I both postponed INDEFINITELY any new car purchases in 2008. Our cars (2005) are paid for and we are not planning on getting one anytime soon. Right now, we are talking MAYBE sometime after 2015.
The banksters are a big part of the problem we are having with financials in this country.
“People who took our second mortgages were a big part of the cause of the housing bust”
I know literally DOZENS of people who got 2nd mortgages to finance CARS.
They KNEW they were going to be paying THIRTY YEARS for a car they may have only kept for five, but they did it, anyway.
Stupidity on your part, should NEVER force a crisis on my part. Not in America, anyway.
My bad. I was not clear in my post. That would be the monthly payment based on the entry level wages of europe - ~6% of income.
Sorry for a bad post.
3000 CHF (~$2400) / month income [entry level in switzerland] - new price of car (toyota aygo) 16000 CHF (~$12800) ... interest rate 1.9% ... 4 year leasing ...
monthly payment quoted 200 CHF = ~6.6%
More like - business is smart enough to know that borrowing now, when Europe itself is about to collapse, is not exactly the smartest move! Currently, companies want LESS debt, not more! If and when they believe that Europe has returned to expansion, they will start borrowing again ...
>>When the guy quit Goldman Sachs in March he said bankers refer to those who pay off their credit cards every year as deadbeats. Yeah I am a homeowner and my banker said if I ever needed a home equity loan..........I cut him off and said Why would I do that? He didnt have an answer.<<
Excellent 2X response.
I have never been called a “deadbeat” for paying off all my cards monthly. I HAVE been called “smart” and credit “desirable.” Maybe you need to associate with a better class of banker... :)
>>If a need to relocate comes up, they CAN’T move as they literally cannot sell the house.<<
What % of people are REQUIRED to relocate to maintain their employment or get new employment? 1%??? 1/2 of 1%???? And why must they sell? There are many options, including renting on both sides.
It doesn’t explain a sea change in people whining about being “upside down” when most people who have houses stay put.
Unless and until you provide links that say that a statistically significant number of people had to “walk away” from their commitment — AFTER TAKING NO MONEY FROM THEIR PRIMARY RESIDENCY — to get employment, yours is just an anecdote. I am sorry about your position but I can tell you I just sold my home for about twice what I paid for it. In the gogo days of the mortgage I could have gotten 5X, but I was silly and figured I was just paying mortgage to live in my home.
The proper presumption is that people stay put. The associated contention is they are just crying because they used their house as a gamble instead of a home.
Thanks, I appreciate the info.
Since I knew around a dozen myself, most who didn’t refinance and piss away their money, then I guess I know what I am talking about.
In case you haven’t heard, a lot of people are losing their jobs and many have to relocate to get something in the same field or just any jobs sometimes. If you are upside down and unemployed, you are not going to be able to sell or even manage to rent the place while moving thousands of miles away to get employment.
Just because YOU haven’t seen in firsthand, doesn’t make it a non-happening.
Yes. Good point. And one that the author doesn't understand.
He constantly makes references to poor Japan, but the Japanese capitalize from retained earnings. They don't need to borrow to continue their magnificent export machine. Germany might be the exception to the European rule; they, too, tend to capitalize largely from profits.
France and the PIIGS, however, are another story. There's trouble there for sure.
I recently looked into a loan for reroofing my house. The nice woman at the credit union talked about how few of these loans they have done in the last 18 months. People aren't borrowing. If they can't pay for it, they don't get it.
In the end, this will crash the economy. Our whole financial structure is built on the buying and selling of debt. If people stop using credit, it will collapse.
>> If you are upside down and unemployed, you are not going to be able to sell or even manage to rent the place while moving thousands of miles away to get employment.
Just because YOU havent seen in firsthand, doesnt make it a non-happening<<
Of all the in-depth analyses I have seen, none have drawn a direct link from unemployment to the requirement to move resulting loss on the primary home. They bemoan it but don’t actually support it. It is almost always from buying a house they could not afford and then hoping to “flip” it and then getting stuck with it.
Because YOU have some anecdotes, doesn’t mean it is is a trend.
But I will ask you — are you really saying that there are so many people being removed from their homes due to employment migration that the change in price from their purchase to their selling that this is a national trend?
Where are you now and where are you forced to move to in order to obtain employment no longer available to you where you are now? What do you do that is transportable but transiental regional? How about the “dozens” of which you know? When localized forces are marching them elsewhere?
Please provide stats, links, studies — something other than “I know a guy who knows a guy...”
>>Since I knew around a dozen myself, most who didnt refinance and piss away their money, then I guess I know what I am talking about.<<
Second thought — a DOZEN? I know 2 people who lost their jobs from the economy (which is consistent with real unemployment rates of 12-18%). Your circle has 100+ people who a) have lost their jobs and b) have to move to gain new employment?
Rarefied air there.
>>In the end, this will crash the economy. Our whole financial structure is built on the buying and selling of debt. If people stop using credit, it will collapse.<<
I respectfully disagree.
Our financial structure is built on people buying and selling things. The loan aspect of our economy is pretty shriveled (witness my 3.5% mortgage and Japan’s 10+ years of negative interest rates).
The money is in large-scale loaning, not the piddling little loans “people” do. Soon, those may disappear, until the invisible hand of Adam Smith determines it is needed again.
But the basics are still there and when it makes economic sense the demand and supply will be there.
I can see why you disagree, but look at the news around the first TARP, and even what is said now about it. No one is really serious about building things, but the desperate plays are being used to improve the credit markets.
>> but look at the news around the first TARP<<
TARP was an affront to pretty much every capitalist concept since the first rock was traded for the first clam (apologies to “B.C.”).
Unless and until one can describe the difference between supply and demand and quantity supplied and quantity demanded, one (including barry Dear Leader) is unqualified to make economic decisions.
Since I know thousands of people, the circle ain’t so small and I am not saying these were all my personal friends. You said, you could pay off your house in cash. I don’t know anyone personally that has that ability. I think your perspective is off since you seem to be rolling in cash unlike the rest of us mere po’ folk.
Seriously, you never heard of anyone relocating for work. I’ve seen people do it all my life since I was a child. Of course, back then the economy didn’t suck so bad they couldn’t sell their house. Your circle must be small indeed.
OK, that does make a big difference. However, I will say this economy has altered the way many of us buy cars (or anything). Like I mentioned before, I personally have put off buying a new car. I had planned to get a new one in 2010, Now I am looking at 2015 or later.
And my house is paid off, as well as I don’t have any credit card debt. I just don’t feel comfortable going into any debt while the current dipshit is running the country and I won’t go into debt till I see REAL improvement, not the fake crap reported by the news media.
I agree. Trouble is that includes the majority of the major banks right now. When I talk with some of the bankers from Europe I wonder if they passed econ 101.
Again, look into it youself.
>>Since I know thousands of people, the circle aint so small and I am not saying these were all my personal friends. <<
OK — dozens out of A thousand is 1.2% If you know thouandS of people, that % goes down. You make my point.
>>You said, you could pay off your house in cash. I dont know anyone personally that has that ability. I think your perspective is off since you seem to be rolling in cash unlike the rest of us mere po folk.<<
You miss my point. A home is a place to live, not a financial instrument. For most Americans, the value of said home is irrelevant to what is owed on it. For a small number (in your case dozens out of thousands), it may be a sad fact of life they made a bad decision, but from tiny numbers does not a groundswell make.
My underlying point is that the number of homes that are upside down is financially and fiscally irrelevant unless and until it is correlated with people who must sell to get new work (which, by your own numbers is 1.2% or so).
As for my cash position, it is from many years of doing without. I don’t buy new stuff until the old stuff that worked well for me dies. Now and again I buy toys on sale but my appliances, car, TVs, etc. were 10-20 years old until I moved and I expect my new ones to last the same (my car is in great shape and should make it for another 15-20 years).
>>Seriously, you never heard of anyone relocating for work. Ive seen people do it all my life since I was a child. Of course, back then the economy didnt suck so bad they couldnt sell their house. Your circle must be small indeed.<<
Well, I don’t share your circle of thousands, but I have invited you to provide links, case studies, etc. proving your position that there are so many people that must relocate that their “upside downess” is a broad financial/fiscal issues.
And I told you I knew of some people who had to relocate so I suggest you read for content.
At this point your anecdotes prove my position. Being upside down on a house is sad but no worse than any other bad decision — nothing that should affect the fabric of our economy.
This time, respond with facts/links/studies and not anecdotes — ‘K?
Do your own f’ing research. I deal with facts that I see and you only post acolades about your own personal vision. Facts are many people are trapped by the current situation and you can read it daily in any damn newspaper in America.
Whether YOU choose to believe it is your own personal issue.
>>Do your own fing research.<<
IOW, you can’t prove your position and now are frantically backtracking.
>> I deal with facts that I see<<
Educated people call those “facts” “anecdotes.” Look it up.