The litmus test for the global economy

EU banks cut lending to the PIIGS by 23% of GDP

BIS loans May12.pngOn 7 September 2008, in its now famous warning that a financial crisis was imminent, the blog noted that “‘Deleveraging’ is an ugly word, and it has ugly implications“.

The chart above shows just how ugly these implications are becoming for the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain).

It is based on data produced since 2009 by the Bank for International Settlements (the central bankers’ bank), and shows the major EU lending flows to the PIIGS. It includes data just published for December 2011:

• Lending to Italy (a G7 group member) has fallen 37%
• Lending to Spain (the world’s 12th largest economy) has fallen 40%*
• Lending to Greece (now in default) is down 54%
• Lending to Portugal is down 32%, and to Ireland down 41%

Major countries simply cannot continue to operate ‘as normal’ when these vast sums of money are being withdrawn from their banking systems:

• Italy has lost $352bn, equal to 32% of its GDP
• Spain has lost $$313bn, 21% of GDP
• Greece has lost $99bn, 33% of GDP
• Portugal has lost $75bn, 32%: Ireland has lost $203bn, 93%

Overall, $1.04tn has been withdrawn, a 39% reduction since December 2009. This is equal to 23% of the PIIGS’ combined GDP.

These numbers, of course, explain why the European Central Bank (ECB) made its emergency €1tn ($1.4tn) loans at the end of December. It says it was seriously concerned “a dangerous loop involving low economic activity, funding stress for banks and a reduction in lending” might occur. This is central bank-speak for saying that the European banking system might well have collapsed.

But the ECB’s lending under the Long Term Refinancing Obligation was just that, lending. It dealt with the immediate cash-flow problem in December. But it did not deal with the solvency issue. Many of these loans will never be repaid, as the assets behind them are now worthless.

* Netherlands lending to Spain is estimated in line with June 2011 levels, as the data is not yet available

Boom/Gloom Index stalls as austerity worries rise

Index May12.pngEU policymakers like to pretend that the Eurozone debt crisis was resolved by the adoption of last March’s new Treaty. An even more disturbing thought is that they might even believe their own propaganda. Who knows?

But on the ground, it is crystal clear that the problems continue to multiply. Latest data from the Bank for International Settlements (the central bankers’ bank) shows lending within Europe continues to slow, as the blog will discuss on Saturday. This is not good news for the global growth agenda.

Meanwhile, the blog’s own Boom/Gloom Index remains stalled for a 3rd month at the 4.0 level (blue column) that has historically divided boom from gloom. And the austerity reading (red line) continues to rise.

The Index’s paralysis seems to mirror rising political uncertainty:

• Next Sunday sees the final round of the French presidential election
• Greece votes the same day for a new government
• Ireland votes later this month in its Eurozone treaty referendum
• The USA is entering presidential elections

Equally, jostling for power continues in Russia (after its recent election) and in China (ahead of the politburo changes in October).