European monetary aggregate data for February was released overnight by the European Central Bank. This is one of the pieces of data I have been waiting for in order to get a better handle on the broader success of the 3 year long term refinancing operation (LTRO).
The annual growth rate of the broad monetary aggregate M3 increased to 2.8% in February 2012, from 2.5% in January 2012.1 The three-month average of the annual growth rates of M3 in the period from December 2011 to February 2012 increased to 2.3%, from 2.0% in the period from November 2011 to January 2012.
M3 components
Regarding the main of M3, the annual growth rate of M1 increased to 2.5% in February 2012, from 2.1% in January. The annual growth rate of short-term deposits other than overnight deposits (M2- M1) increased to 3.1% in February, from 2.6% in the previous month. The annual growth rate of marketable instruments (M3-M2) decreased to 3.1% in February, from 4.4% in January. Among the deposits included in M3, the annual growth rate of deposits placed by households increased to 2.0% in February, from 1.7% in the previous month, while the annual growth rate of deposits placed by non-financial corporations stood at 0.4% in February, compared with 0.3% in the previous month. Finally, the annual growth rate of deposits placed by non-monetary financial intermediaries (excluding insurance corporations and pension funds) decreased to 3.5% in February, from 5.6% in the previous month.
So in broad terms there has been an increase in M3. However, the devil is in the detail.
Counterparts to M3: credit and loans
Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of Monetary Financial Institutions (MFIs), the annual growth rate of total credit granted to euro area residents stood at 1.4% in February 2012, unchanged from the previous month. The annual growth rate of credit extended to general government increased to 6.0% in February, from 4.9% in January, while the annual growth rate of credit extended to the private sector decreased to 0.3% in February, from 0.6% in the previous month. Among the components of credit to the private sector, the annual growth rate of loans decreased to 0.7% in February, from 1.1% in the previous month (adjusted for loan sales and securitisation2, the rate decreased to 1.1%, from 1.5% in the previous month). The annual growth rate of loans to households stood at 1.2% in February, compared with 1.3% in January (adjusted for loan sales and securitisation, the rate decreased to 1.8%, from 2.0% in the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, stood at 1.8% in February, unchanged from the previous month. The annual growth rate of loans to non-financial corporations decreased to 0.4% in February, from 0.7% in the previous month (adjusted for loan sales and securitisation, the rate decreased to 0.6% in February, from 0.9% in the previous month). Finally, the annual growth rate of loans to non- monetary financial intermediaries (excluding insurance corporations and pension funds) decreased to 0.6% in February, from 2.0% in the previous month.
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This data is obviously in aggregate which, once again, hides some important detail. At a national level, German bank lending remains soft; French and Italian lending has continued to slow; Spanish, Portuguese, Greek, Irish (and – for households – Dutch) lending is very negative. There has also been a continuation of outflows of deposits from the Greek and Spanish Banking systems which is sure to upset those worried about TARGET2 balances.
Although I think we still need to wait for the ECB’s next bank lending survey to get the full story, it is becoming clear that the LTRO is failing to transmit monetary policy in the private sector of the Eurozone. In fact, as far as I can tell we are seeing an acceleration of the “zombification” of the periphery banking system which is certainly not the outcome Mario Draghi was aiming for:
