Euroland deposits and loans, part 1
0It is easy to look back and see the writing on the wall, and it is now just over two years since then ECB Governor Trichet first announced an imminent, and as it turned out premature, end to the ECB’s quasi QEP and hinted at the potential for ECB rate hikes in 2010.
Within days, the Euroland commercial banks, which had previously been happy buyers of Greek debt, and in so doing had allowed the Greeks to amass a huge budget deficit, began to exit their positions as they feared a rise in their own funding costs.
Within weeks, this exit from Greek sovereign debt markets had become a rout, within months there was contagion to other peripheral economies, and the Euroland crisis was underway.
As with the initial handling of the failure of Lehman, lessons could have been learned and policies varied to prevent disorderly markets but in Euroland despite the passing of two years, in which there have been countless summits, conference calls and press briefings, the crisis continues and, in many respects, has become notably worse rather than better.
In particular, as Greek and other residents of Europe’s embattled periphery have increasingly come to fear a possible breakup of the Euro, and this accentuated after ‘Merkozy’ in effect suggested at the G20 that they should think about leaving, so they have begun to view bank deposits in their own banks as risky, and the resultant capital outflows have made the regions’ banking systems even more precarious. And it’s not as if the behaviour of depositors is irrational. Indeed, a rational Greek who feared breakup of the Euro could sensibly want to borrow Greek versions of the Euro but at the same time hoard German versions of the Euro and this has resulted in positive credit growth in Greece until recently, despite the calls for austerity and despite negative deposit growth in the local banking system. The net result is that the volume of Greek private sector credit has increased by 27% since the PIGS crisis began, and over the same period, nominal GDP has declined by 3%, and the volume of bank deposits has declined by almost a third.
As a result, the Greek private sector debt burden has risen by almost a quarter since people first noted that it was too high and the banks’ loan to deposit ratio has moved from circa 80% to circa 135%. Meanwhile, we also find that as Greece’s economy has contracted in nominal as well as real terms, the budget deficit has proved predictably intractable and the volume of public sector debt is now 20% higher than when the crisis first became noticed.
Greece is of course an extreme example but in Italy, in which nominal GDP has only increased by 3% since the end of 2009, private debt has risen by 14% (the debt ratio is no longer particularly low at close to 90%) and the volume of public debt outstanding is now 8% higher (from a very high base). At the same time, the loan to deposit ratio in Italy’s banks has moved from 115% to 122%.
Spain, meanwhile, has seen some improvement in its loan deposit ratios as a result of the relatively high profit-sapping deposit rates that some banks offered, although the ratio remains above unity, as it does in Portugal. France has seen a rise in its loan to deposit ratios as its banks have become dependent on TARGET financing but German banks have seen their loan to deposit ratios drop below 80% as deposits have piled up in their vaults but domestic loan demand has remained moribund.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla