Draghi is in trouble: credit still doesn’t flow in the periphery

New credit loans data to rise concerns. New loans granted by banks and traditional saving banks to companies decrease by 12.5% so far this year, in other words, €140 bn.

The new descent of the credit can be explained by the sharp contraction of more than one million euros in loans: only in May they plunged by 24%, which is a symptom of entities’ doubts about being able to recovered the money they lent. Furthermore, only loans below this amount grow by 4.9%.

Households credit looks better than corporate. According to the Bank of Spain, loans to families rise by 12.8% so far in 2014. In this year term, credit granted by entities add up to about €24bn.

Credit drop isn’t just a Spanish issue. Afi’s experts highlight corporate loans in Portugal and Ireland went down by over 10% in yearly terms and shows stagnation in the leading European economies: Germany and France.

The absence of credit was one of the arguments that Draghi used to justify liquidity auctions or TLTROs. But it is just not clear if these injections of liquidity will achieve their purpose. The increase of the liquidity will not occur until the end of 2014 and the TLTROs settings should be adequate to reduce the incentive to use those funds for carry trade strategies.

So far, the central bank hasn’t explained the way auctions and penalties to entities will work. As regards impact of new liquidity on credit, Afi believes most of it will be seen next year. As long as BCE action helps keep accommodative monetary conditions, an obstacle for banks to lend is overcome. Even without new money from the ECB, lower restrictions on credit, prompted by looser monetary policy, can contribute to reactivate credit operations.

There is a risk that the ECB measures are coming too late and that the credit won’t flow into the stressed banking system. In this scenario, don’t discard new relapses in peripheral countries, a situation that would open the door to Draghi adopting a program of direct purchase of public debt.