The ECB bails out the banks yet again, the Euro area economy not so much

One of the battles in economics is between getting data which is timely and it being accurate and reliable. Actually we struggle with the latter points full stop but especially if we try to produce numbers quickly. As regular readers will be aware we have been observing this problem in relation to the Markit Purchasing Manager Indices for several years now. They produce numbers which if this was a London gangster movie would be called “sharpish” but have missed the target on more than a few occasions and in he case of the Irish pharmaceutical cliff their arrow not only missed the target but the whole field as well.

Things start well as we note this.

The eurozone economic downturn eased markedly
for a second successive month in June as
lockdowns to prevent the spread of the coronavirus
disease 2019 (COVID-19) outbreak were further
relaxed, according to provisional PMI® survey data.
The month also saw a continued strong
improvement in business expectations for the year

As it is from the 12th to the 22nd of this month it is timely as well but then things go rather wrong.

The flash IHS Markit Eurozone Composite PMI rose
further from an all-time low of 13.6 seen back in
April, surging to 47.5 in June from 31.9 in May. The
15.6-point rise was by far the largest in the survey
history with the exception of May’s record increase.
The latest gain took the PMI to its highest since
February, though still indicated an overall decline in
business output.

Actually these numbers if we note the Financial Times wrong-footed more than a few it would appear.

The rise in the eurozone flash Composite PMI in June confirms that economic output in the region is recovering rapidly from April’s nadir as restrictions are progressively eased. ( Capital Economics )

Today’s PMI numbers provide further evidence of what initially looks like a textbook V-shaped recovery. As much as more than a month of (full) lockdowns had sent economies into a standstill, the gradual reopenings of the last two months have led to a sharp rebound in activity. ( ING Di-Ba)

The latter is an extraordinary effort as a number below 50 indicates a further contraction albeit with a number of 47.5 a minor one. So we have gone enormous contraction , what would have been called an enormous contraction if they one before had not taken place and now a minor one. But the number now has to be over 50 as the economy picks up and this below is not true.

Output fell again in both manufacturing and
services, the latter showing the slightly steeper rate
of decline

On a monthly basis output rose as it probably did at the end of last month, it is just that it is doing so after a large fall. The one number which was positive was still way too low.

Flash France Composite Output Index) at 51.3
in June (32.1 in May), four-month high.

For what it is worth the overall view is as follows.

We therefore continue to expect GDP to slump by over 8% in 2020 and, while the recovery may start in the third quarter, momentum could soon fade meaning it will likely
take up to three years before the eurozone regains
its pre-pandemic level of GDP.

Actual Data

From Statistics Netherlands.

In May 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 7.7 percent up on the same month last year. This price increase is higher than in the previous months.

Well that will cheer the European Central Bank or ECB. Indeed ECB President Lagarde may have a glass of champagne in response to this.

 In May 2020, house prices reached the highest level ever. Compared to the low in June 2013, house prices were up by 47.8 percent on average in that month.

Staying with the Netherlands and switching to the real economy we see this.

According to figures released by Statistics Netherlands (CBS), in April 2020 consumers spent 17.4 percent less than in April 2019. This is by far the largest contraction in domestic household consumption which has ever been recorded by CBS. Consumers mainly spent less on services, durable goods and motor fuels; on the other hand, they spent more on food, beverages and tobacco.

If we try to bring that up to date we see that if sentiment is any guide things have improved but are still weak.

At -27, the consumer confidence indicator in June stands far below its long-term average over the past two decades (-5). The indicator reached an all-time high (36) in January 2000 and an all-time low (-41) in March 2013.

Moving south to France we were told this earlier today.

In June 2020, the business climate has recovered very clearly, in connection with the acceleration of the lockdown exit. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 18 points, its largest monthly increase since the start of the series (1980).

The jump is good news for the French economy although the rhetoric above does not match the detail.

At 78, the business climate has exceeded the low point reached in March 2009 (70), but remains far below its long-term average (100).

The situation is even worse for employment.

At 66, the employment climate still remains far below its May 2009 low (73), and, a fortiori, its long-term average (100).

Oh and staying with France I know some of you like to note these numbers.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Just as a reminder the UK measuring rod is different and tends to be around 4% of GDP lower. But of course both measures will be rising quickly in both France and the UK.


Let me now switch to a speech given earlier today by Philip Lane of the ECB.

 Euro area output contracted by a record 3.6 percent in the first quarter of the year and is projected to decline by a further 13 percent in the second quarter. While growth will partially rebound in the second half of this year, output is projected to return to the level prevailing at the end of 2019 only at the end of 2022.

In fact all of that is open to doubt as the first quarter numbers will be revised over time and as discussed above we do not know where we are right now. The forecasts are not realistic but manufactured to make other criteria such as the debt metrics look better than otherwise.

Also there is a real problem with the rhetoric below which is the cause of the policy change which was the Euro area economy slowing.

Thanks to the recalibration of our monetary policy measures announced in September 2019 – namely the cut in our deposit facility rate, enhanced forward guidance, the resumption of net asset purchases under the asset purchase programme (APP) and the easing of TLTRO III pricing – sizeable monetary accommodation was already in place when Europe was confronted with the COVID-19 shock.

As that was before this phase he is trying to hide the problem of having a gun from which nearly all the bullets have been fired. If we cut through the waffle what we are seeing are yet more banking subsidies.

The TLTRO programme complements our asset purchases and negative interest rate policy by ensuring the smooth transmission of the monetary policy stance through banks.

How much well here was @fwred last week.

ECB’s TLTRO-III.4 : €1308bn The Largest Longer Term Refinancing Operation ever………Banks look set to benefit, big time. All TLTRO-III will have an interest rate as low as -1% between Jun-20 and Jun-21, resulting in a gross transfer to banks of around €15bn. Most banks should qualify. Add tiering and here you are: from NIRP to a net transfer to banks!

So the banks get what they want which is interest-rate cuts to boost amongst other things their mortgage books which is going rather well in the Netherlands. Then when they overdose on negative interest-rates they are bailed out, unlike consumers and businesses. Another sign we live in a bankocracy.

Apparently the economy will win though says the judge,jury and er the defence and witness rather like in Blackadder.

An illustrative counterfactual exercise by ECB staff suggests that the TLTRO support in removing tail risk would be in the order of three percentage points of euro area real GDP growth in cumulative terms over 2020-22.


I nearly forgot to add that Austria is issuing another century bond today and yes I do mean 100 years. Even more extraordinary is that the yield looks set to be around 0.9%.

The Investing Channel



18 thoughts on “The ECB bails out the banks yet again, the Euro area economy not so much

  1. Hello Shaun,

    If I am to believe Bob the Banker from yesterday then it’s all just a money merry go round.

    Might as well as shut the blog down and go fishing ….;-)


    • I wouldn’t suggest shutting it down.

      But I would recommend learning what money is, where it comes from and how it works and tailoring the blog-posts accordingly.

      Unfortunately, it’s in danger of becoming mundane and boring then, which doesn’t get you clicks.

      If it’s conspiracy theories that people want, that’s what you have to give them

      • They mark down my “conspiracy theories” because they’re logic based, but once again it’s the banks getting the money, as if the past 12 years of making sure that (practically) no-one defaults on a loan, despite sacrificing the rest of the economy to pad the value of banks’ assets. Despite banks getting trillions from govts. AGAIN.
        Despite “scientific” advice that changes faster than the weather, when it suits.
        Tell me how to justify changing the social distancing rules after 3 months; are people coughing, talking, sneezing singing less powerfully?
        Take the advice on going to the pub; one metre plus, but you mustn’t face each other, no leaning on the bar, etc.
        When they open, how crowded will they be?
        How will you be heard when ordering other than by shouting?
        It’s nonsense, an affront to the intelligence, and if it was dangerous last week, it’s dangerous this week, and if it isn’t dangerous next week, it wasn’t dangerous in April.
        How come cold damp & crowded conditions causes infection in meat packing plants, but there are no such issues in fish & seafood plants which have to be colder, damper & more crowded (I’ve worked in one, so I know).
        How come no issues with veg processing?
        People may want conspiracy theories, but they want those they can scoff at, for entertainment; for reassurance that the people who control their lives are benign, altruistic even, and that those who vilify them have a screw loose.
        Those that get too close to the truth are upsetting & definitely not wanted.

        • you make it sound that trying to ensure virtually nobody defaults on a loan is a ‘bad thing’.

          Anyone with a mortgage or personal loan is probably going to be relying on regular paid employment in order to be able to service and repay that loan. Surely, striving to be in a situation whereby anyone who wants a stable, well paid job can have a stable well paid job is something we should always be aiming for.

          BTW, banks don’t get ‘trillions from governments’

          • The situation the economy has been in for the last 15 years is due to central banks doing all they can to make sure people who borrowed too much can keep on paying their debts.

            As nice as that maybe in the short term its an epic disaster for the economy and society in the medium term.

          • “you make it sound that trying to ensure virtually nobody defaults on a loan is a ‘bad thing’.”
            Actually I agree, since when is stealing money from savers i.e giving effectively negative real interest rates to subsidise those who have overpaid and overborrowed to buy property and in some cases portfolios of properties???

            Why should one group of the population be subsidised to speculate by keeping interest rates artificially low other than it maintains asset bubbles and secures banks from the inevitable write downs should market forces ever rear their ugly head.?
            Why should “zombie” companies be kept afloat by zero rates and even bond buying by the government at the expense of the profitability and potentially the survival of more efficient better run competitors?

          • I didn’t say it was good or bad that people default on loans; it was lengths to which tptb go to for that purpose; that people who show prudence are sacrificed for financially-incontinent borrowers & lenders; that the purpose of making sure they don’t default is not to protect borrowers, so the next time the banks need anything, (like an excuse to shut down the economy), it will just as swiftly ruin them, & millions of others with unemployment if it suits.
            That’s what I was saying when I wrote “TO PAD THE BANKS’ ASSETS. (and you’re smart enough to know it.)
            FURTHERMORE, in line with shareholder responsibility, since the BoE was nationalised in 1946, & the ECB is owned by the EU, the banksters DO get trillions from govts

  2. given that in the UK, the low (but positive) rates of the BofE coupled with the Bofe’s relatively small QE portfolio, has resulted in a transfer from the Financial system to the Treasury (via the BofE and the APF) of £98bn (up until the end of Feb this year), with roughly another £60bn waiting to be transferred, the transfer from the EZ financial system to member state governments (via the ECB and the member state national central banks) over the past few years must be several times this number (given the negative rates in the EZ and the ECB’s much larger balance sheet). In this context a transfer in the other direction of €15bn is pretty small. It won’t even come close to the transfers from the banks to the ECB in just one year.

    • Hi Robert

      To the poor and hungry 15 billion Euros would be a lot and could do a lot of good. As to Bank of England QE there will be capital losses from Gilts bought above par to set against that. The most severe case of that is the 2068 maturity which it has been paying around 230 for.

      Whilst the ECB has a larger balance sheet the amount of sovereign QE is lower in relative terms. I have just been looking at its accounts but the size of the transfers to the national governments is well hidden.

      • This is from: ‘New Paradigm in Macroeconomics’, by R.A.Werner, p374, note 2.
        “Take the case of a central bank purchasing bad loans from banks at a book value {say, $100b}, although their market value is lower {say, only $20b}. It may superficially appear as if a loss of $80b is made.
        This would be true in the case of agents other than the central bank. The central bank, however, in this case will make a profit of {at least} $20b {since it creates money at zero cost and obtains something worth $20b with it}. . . . ”

        • Prof Werner does seem to have gone off the rails a bit in recent years. Some of his earlier work was brilliant, but he does seem to have gone all “conspiracy theory” in recent years, particularly in relation to the current Covid crisis.

          Anyone can create an IOU ‘at zero cost’. It just takes a scrap of paper and a bit of ink. If you can persuade somebody to give you a physical asset or good (or even another financial asset) of equal value in exchange for your IOU, have you ‘made a profit?

          Of course not!

          You have acquired an asset and created your own liability of equal value. There is no profit.

          If you acquire an asset of lower value than the IOU you have written, you will have made a loss.

          For a central bank, making a loss isn’t really an issue. It can operate perfectly well whilst insolvent. But there is no profit from doing what he describes.

          • It’s illegal for businesses to act whilst insolvent, unless you’d like to argue that central banks are not businesses, in which case they’d be arms of govt. & so do give banksters trillions.
            Can’t have it both ways.

          • show me the accounting whereby central banks give banks $trillions (I won’t use the childish and immature term ‘banksters’ but you go ahead and use it if it makes you happier).

            just show mew the mechanism, with the accounting, whereby that happens.

  3. When you think of what has happened to Austria in the last 106 years, 0.9% looks like a small return for the risk.
    We are of course back to that permanent theme of inflated house prices sucking demand out of the various economies, but somehow the central banks keep going with the same failed lunacy. House prices, which used to be an obsession just in the UK and US are now spreading their grasp across Europe with the same result. Higher house prices do not create more jobs, raise productivity nor encourage economic activity. They just feed on consumption demand. As unemployment rises to cover what should have happened over the last twelve years (and arguably twenty), the primary concern for any mortgage payer is going to be the mortgage. This means that consumption will be sacrificed as these small changes in effective rates through QE just produce a few quid or euros, which would have to be saved for many months just to cover a month’s payment.
    The personal finance guru of a few years back, Alvin Hall used to say that you should have three months’ accessible cash for a cushion – even with savings from mortgage holidays (watch those extend like Japanese mortgages) and not spending on travel, there will be plenty of households that do not have this.
    More printing = more can kicking = more economic damage, leaving us with the same point: why don’t these journos raise the point about twelve years of a failed policy? Ah, of course, for the euro, there is that yield spike for the weaker brethren. Nevertheless, there are going to be house price falls and business failures on a grand scale, so what is going to happen with all this bad debt? There is talk of a bad bank in Europe and in the U.K., but as Shaun pointed out RBS has been a bad bank since 2008 (incidentally, if you apply for a job with them, there is a lot of what James O’Brien calls wanging about “diversity” and erm, nothing about productivity and returns).

    • Hi Dave

      Whatever did happen to Alvin Hall? For a while it felt like he was everywhere on the BBC. As to central banks and the housing market, well even when ours travels it looks for guess what.

      “The fall in aggregate demand due to the COVID-19 shock has brought the eight-year long US housing market expansion to a halt. At the same time, the Federal Reserve and the US Government have deployed significant resources to support households and businesses. These actions should help weather the ongoing crisis and lay the seeds for the next recovery. It is, however, highly uncertain how the post-COVID-19 housing recovery will look.” Bank Underground yesterday.

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