What the credit numbers tell us

The ECB has this week released the statistics for money and credit for December, and they suggest that there is no credit crunch in the euro area as yet. The ECB itself takes these statistics very seriously because a sharply decline in money growth, and credit provision, could indicate a slowdown ahead. As ever, all kinds of monetary data have to be treated with cautious, when used for macroeconomic analysis. The ECB's monetary policy operations since August have probably boosted monetary growth and credit expansion artificially. This also happened in the US, where there is evidence of a credit squeeze even though this is not fully reflected in the flows of fund statistics. A contrary piece of evidence is also the ECB bank lending survey for December, which shows that bank have serious tighten credit standards.

 

So any evaluation of current credit market condition would therefore require some analysis on the impact of ECB monetary operations. In the last monthly report the ECB states the following: "While the ECB’s open market operations do

not have a direct impact on money and credit aggregates, they may have affected monetary developments indirectly through their impact on short-term money market interest rates and the pass-through of these rates to bank lending

and deposit rates. Such indirect effects, which work through the opportunity cost of holding money and the cost of external financing, reflect demand by households and firms for money and bank credit."

 

So this means that effects so far have been indirect, via the increase in money market rates - which form the basis for loan rates. There has been as a de facto tightening of monetary policy which the ECB did not compensate for. But without the credit crisis, this tighening would have almost certainly occurred through higher policy rates - and thus higher market rates as well.

 

Those statistics tell us clearly that loans to households and companies are still far removed from conditions one would encounter during a credit squeeze. The following three charts illustrate the annual increase in loans to households, which experienced a small decline, albeit from very high levels, loans to companies, which show a strong increase right through to December, and to insurance companies, where loan activity has been weakening, though as yet not out kilter with previous episodes.

 

 

 

 

 

To see what a real credit crunch looks like, here is an example what happened to German bank lending during 2001-2005, when credit growth rates became negative in some periods. The fairly long period of disappointing economic growth in Germany 2002-2005 was characterised by a series problems in the financial sector, which proved immune to lower interest rates. It look a long time until these problems were flushed out of the system.

 

 

 

Judging from those data, the only evidence we are seeing so far is that credit provision is coming down from positions that have been, and still are, considered unsustainable.

 

So what about the ECB's lending survey, which suggests that banks are tightening credit provisions. In practice this means they are raising the criteria on which they lend, and/or widening credit margins to reflect great risk. The euro area, like other economic regions, has been through a period of unsustainable credit growth, and the first thing to notice is that the tightening in credit standards is, so far, compatible with a return to normality (to which the credit crisis has contributed). But this effect is far from extreme. Here is a chart showing banks perceptions among banks as to how far the credit crisis had an effect on the tightening of credit.

 

 

 

 

The observations so far is that, until December 2007, there has been no credit, or even a near credit cruch in the euro area. The bank lending survey suggests that there will be a continued decline in the growth rate of lending, but banks are not expecting a dramatic fall. The global financial crisis may still hit the euro area in unforeseen ways. So this is not a prediction that the euro area will escape a credit crunch. It might, or it might not. But it is clear that the euro area has not yet had one. It would be very surprising if the January data, which are due in about a month time, would show a substantially different pattern.

 

 

 

 

 

 

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