And the ECB will direct it. Ha.
As we mentioned earlier on Friday, UBS analysts John-Paul Crutchley and Alastair Ryan have been looking at the European banking landscape afresh — specifically in relation to the credit support ops of the European Central Bank. Their findings make for insightful reading.
The below chart is particularly striking.
That is loans to deposits (y-axis) and loans to GDP (x-axis) by European country. A higher loan to deposit ratio implies the nation’s banking system is relatively over-lent — it has made available more credit to the private sector than can be sustained by the deposit base within the country. A high loan to GDP ratio suggests the economy is increasingly over-borrowed, or the private sector has borrowed excessively in relation to the country’s economic ability to sustain the debt. In short, you don’t really want to be in that upper right hand quadrant.
Here’s what the analysts say:
Countries and households can be over-borrowed and banking systems can be overlent. Both of these are found in the economies with the highest private-sector debt to GDP levels: Spain, Ireland and Denmark. These are also the economies we expect to deliver the weakest GDP out-turn over the next year. Ireland is already a significant creditor to the ECB and debt maturities mean Spain may follow suit, particularly if “round-tripping” to help fund government deficits continues.
On the Spanish point in particular, the analysts see the country enthusiastically jumping on the ECB bandwagon — a trend most notable via a glance at its recent securitisation history:
There are two forces which have pushed Spanish banks to increase the amount of securitised liabilities. Firstly, Spanish government has created Financial Asset Acquisition Fund (FAAF) in order to provide medium-term liquidity to the banking system by purchasing securitised bonds. The FAAF has a total budget of €50bn, with €19bn already spent from November 2008 to 30 January 2009. FAAF is financed entirely by Spanish government.
Secondly, securitised debt can be used as collateral for refinancing operations with ECB. This allows banks to obtain much-needed funding at a very low cost. According to our estimates, Spanish banks had borrowed at least €45bn (net figure) from ECB as of May 2009.Related links:
The ECB as ‘liquidity monster’ – FT Alphaville
ECB secret QE, or not – FT Alphaville
ECB pushes on relentlessly despite bubble fears – The Cover