BdE released data on financing of the Eurosystem, basically the BdE balance sheet and data on financing by credit institutions. Regarding the BdE balance sheet the latest data, the first after the ECB announcement of the OMT are quite positive:
Both MRO and LTROs were lower in September, a total reduction of €11.7bn which is a significant amount. This was reflected in the Target2 balance which dropped by €8.77bn to €419.85bn (still a very large deficit) as well as in the banknotes demand which was €2.03bn lower. Deposits to general government on the other hand registered a new low of €4.04bn (a €2.4bn reduction), pointing to government cash troubles, while credit institutions deposits and current accounts were €1.33bn lower. Since funds at the deposit facility do not earn interest anymore it seems that banks used the Target2 inflows as a source of funds to lower their loans from BdE, rather than to increase their liquidity buffers.
The same data release also provides statistics on loans to households and non-financial corporations. Both series show a clear pattern of negative credit growth. Effective flows for household loans (till August) were -€22.8bn (compared to -€21.48bn for the total of 2011) and -€48.29bn for non-financial corporations (compared to -€25.41bn for 2011). In total, the negative flow is equal to €71.09bn which points to an annual flow of -€100bn (more than double that of 2011). That’s around 9.5% of GDP which coupled with a current account deficit of 3% GDP equals to a drag of almost 12.5% of GDP. Since the annual budget deficit will probably register close to 7% of GDP, the data show that the 2012 recession will be quite deep. In my view, the -2% projections are actually optimistic since the drag from private debt repayment is extremely large and government austerity measures quite heavy. Just for comparison, during 2011 the effective flow was -4.4%, the current account -3.5% while the government deficit 8.5% with the real GDP growth rate at 0.4% so this extrapolation seems reasonable.
Lastly, data is also available on profit-loss accounts of credit institutions till 2012Q2:
What is evident is the fact that profit before tax has turned strongly negative since 2011Q3, around 2-2.5% of the adjusted average balance sheet. Unless there’s a strong rebound in economic activity and loan demand or if capital outflows totally reverse course I ‘m not so sure why someone would look forward to Spanish banks posting profits in the near future, something which makes their capital needs larger.
10 Σχόλια
Comments feed for this article
25 Οκτωβρίου, 2012 στις 10:38
Sergei
It is an interesting question how intra-system liabilities are related to the balance sheet size. In the limit when all loans of spanish banks are repaid there should be no intra-system liabilities as well. So while we might have reached the ceiling for intra-system liabilities I am not sure it means that the stress is over.
25 Οκτωβρίου, 2012 στις 10:49
kkalev
For loans to get repaid Target2 liabilities must decrease, not the other way round. That basically means that the NIIP of Spain must again reflect claims by the external private sector rather than the official (monetary) sector. Private investors must increase their portfolio and other investment towards Spain which will provide Spanish banks with long duration liquidity which they can use to repay BdE. The Target2 balances reflect capital flight and financial account stress.
25 Οκτωβρίου, 2012 στις 16:31
Sergei
I meant private sector loans, not the Bank of Spain
26 Οκτωβρίου, 2012 στις 09:47
kkalev
Loan repayment also destoys the corresponding deposit so i ‘m not so sure where you are going. In the limit, all loans of Spanish banks cannot be repaid since Spain has a negative NIIP..
26 Οκτωβρίου, 2012 στις 09:53
Sergei
NIIP is (ideally) a market valuation of all assets and liabilities including equities. However bank loans can be repaid, neutrally to NIIP, as long as liabilities are shifted to the government via IMF/etc. However as bank loans are repaid the stress on the payment system becomes smaller as liabilities of banks become smaller and therefore the ability to move deposits around. So my point is that as private loans contract, at least to some degree intra-system liabilities have to contract as well. The interesting question is by how much. Next level question is if intra-system liabilities contract is it really the sign of stabilization or rather the consequence of private sector contraction?
26 Οκτωβρίου, 2012 στις 10:14
kkalev
You are assuming that Spain can increase its NIIP by taking official sector loans which will be moved to the private sector who can repay its loans. The most probable scenario involves loans used to repay existing external liabilities which will just shift NIIP claims from the private to the official sector, not new lending.
As bank loans are repaid the economy shrinks (since demand can only come from new net lending) while a larger part of the banks balance sheet is used as collateral for BdE loans to cover Target2 liabilities. In order for the latter to contract, the foreign sector must increase its investment in Spain or the Spanish sector must decrease its investment abroad and move funds in Spain. Some Spanish borrowers might eventually have to do that in order to repay their loans but it’s not possible to know when that might happen.
The large movements in Target2 balances were the result of foreign institutional investors reducing their portfolio and other investment in Spain. Any large movements at the opposite side will have the same source.
26 Οκτωβρίου, 2012 στις 10:32
Sergei
I am not arguing. I am just curious what the effects of private loan contraction on intra-system liabilities could be. And my gut feeling tells me that they are positively correlated. And so I am curious to what extent.
26 Οκτωβρίου, 2012 στις 10:41
kkalev
Let’s try and be as simple as possible. A bank loan is represented by bank liabilities in the form of deposits to domestic customers and/or repos/debt securities to foreigners. If it is repaid both parts of the balance sheet will shrink.
The domestic customer might move funds from abroad to pay the loan which will lower Target2 liabilities. But most of foreign liabilities are to institutional investors/banks. So the real question is if the foreign investor will rollover its claims and finance other assets of the bank or move the funds abroad in which case Target2 liabilities will increase. Only the domestic customer case provides for a scenario where Target2 liabilities actually decrease. In a shrinking asset case where Spanish banks need fewer financing, Target2 liabilities will most probably increase since investors, even if willing to maintain funding, will not be able to find investment opportunities and will move funds to other countries.
Intra-system liabilities are mostly related to shifts in investment management by foreign investors.
26 Οκτωβρίου, 2012 στις 10:52
Sergei
I look at it differently. Target2 is about payments. Yes, payments come on top of different financial portfolios, both foreign and domestic, but that is as far as we can stretch here. The scale of payments flows needs a certain level of financial asset base. And the lower the size of financial asset base the smaller the scale of payment flows is. Target2 is an accumulation of previous payment flows made from the different base of the past financial assets base. It is a) quite safe to say that at some point of time the Target2 balances will reach its peak (theoretical level is the limited by the size of domestic financial assets) and b) probably the flows will have to reverse. The argument for the 2nd claim is the following – a) all foreigners who wanted to pull out have pulled out long ago and b) domestic asset holders who moved into foreign assets are likely to pull-in since economy is contracting and therefore they might need their assets to cover their liabilities.
So in my story foreign investors is pretty much a done deal. Just ignore them.
26 Οκτωβρίου, 2012 στις 11:06
kkalev
I think that you are starting with a wrong stock. What’s important is the stock of foreign liabilities, not the asset side of domestic banks. Spain still has over 500bn in bonds and notes liabilities and 400bn in deposits:
Click to access a1728e.pdf
Click to access a1729e.pdf
I don’t know if foreign investors are a ‘done deal’, especially if rating agencies continue downgrading. Their stock is very large (close to 900bn) and any investment maturity not rolled over will lead to higher Target2 liabilities. The flows are much larger than the effective flows of 10-20bn/month of loan repayments by the Spanish private sectors (with most financed by a reduction of domestic deposits and/or lower purchases of foreign products, not trasnfer of funds from abroad).