The financial sector cripples Eurozone growth prospects

Ilmārs Rimšēvičs, Governor of the Bank of Latvia, Andrus Ansip, Estonian Prime Minister, Valdis Dombrovskis Latvian Prime Minister and Andris Vilks, Latvian Minister for Finance, all applauding, at midnight of 31 December 2013. The next minute Latvia joined the Eurozone. They all stand next to a poster with a 1-euro coin and the inscription "Euro. Latvia grows." (in the foreground, from left to right). (EC Audiovisual Services).

Ilmārs Rimšēvičs, Governor of the Bank of Latvia, Andrus Ansip, Estonian Prime Minister, Valdis Dombrovskis Latvian Prime Minister and Andris Vilks, Latvian Minister for Finance, all applauding, at midnight of 31 December 2013. The next minute Latvia joined the Eurozone. They all stand next to a poster with a 1-euro coin and the inscription “Euro. Latvia grows.” (in the foreground, from left to right). (EC Audiovisual Services).

According to a European Central Bank Press release published on 3 January 2014, Eurozone banks further reduced their overall outstanding balance of loans to the private sector during November 2013. Given that industrial multinationals and big services firms do not rely on bank loans for their financing, it’s mainly the SMEs that have been deprived of the means to support their investment projects. Let’s dig a bit deeper into that.

Aggregating loan balances for the entire euro area hides, however, a dreadful reality in certain member states and sectors. In fact, some peripheral Eurozone countries hit by crisis like Greece, Italy, Spain, Portugal, Ireland and others are faced with completely different bank loan options than their counterparts in core member states like Germany and France. It must be also noted that, according to ECB’s Bank Lending Survey published last October, loan queries by SMEs in peripheral countries are usually denied by banks, in contrast to usually positive responses the SMEs get by the lenders in core countries.

Pariah SMEs and countries

Put all that together and the result is that the new reduction of the overall loan balance (to the entire private sector) in the euro area last November was much more elevated in the case of SMEs in peripheral countries than the aggregate “-2.3%” found by the ECB. There is more to it though; the relevant Press release published by the central bank on 3 January 2014 also revealed that in the three month period under scrutiny, the negative evolution of the aggregate balance of loans accorded to the private sector kept deteriorating from -2.1% in September, to -2.2% in October and finally with -2.3% in November 2013.

Undoubtedly, those negative developments in the financial sector of the Eurozone economy will affect its macroeconomic prospects for many months to come. It also seems that, soon, the deep downturn of the real economy in the periphery won’t be outweighed by the sluggish growth in Germany and some other small core Eurozone countries. Even Holland is still in recession. As a result the entire Eurozone may return to the negative area of the graph.

How difficult is it for the SMEs?

Coming back to ECB’s Press release, Eurozone’s monetary leader reveals that the situation was even more difficult as far as the credit conditions are concerned in relation to the ‘residents’, a term meaning all economic players. It stresses that “Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of Monetary Financial Institutions (MFIs), the annual growth rate of total credit granted to euro area residents was more negative at -1.4% in November 2013, from -1.0% in the previous month… while the annual growth rate of credit extended to the private sector was more negative at -1.6% in November, from -1.4% in the previous month”.

Obviously, the above paragraph means that the situation is worse when the issue came to loans. This is because loans are a part of credit, the rest being other forms of financing like equity issues. However, the SMEs have no access to those other forms of financing and depend almost exclusively on banks to finance their investment projects. No need here to repeat the importance of the SMEs in the real economy on every account (GDP growth and employment).

This said, it’s very interesting to dig a bit deeper in the constellation of loans to the private sector. In relation to that, the ECB found that the situation was worse when it counted the loans accorded to the private business sector, after excluding the credit accorded to households and the private financial sector. Let’s see to that.

Even worse

The same Press release observes that, “The annual growth rate of loans to non-financial corporations stood at -3.9% in November, compared with -3.8% in the previous month”. In short, the real economy businesses received 3.9% less credits, in comparison to -2.3% for the entire private sector. No need to stress again that, for the reasons stated above, we can make an educated guess that the reduction of loans accorded to SMEs in peripheral countries must have been more than double the overall relevant figure for Eurozone’s business sector (-3.9%) that is around -8%.

All in all, there is no doubt that during the next few months Eurozone’s real economy will pay the price for the inability of its banking sector to consolidate. The same is true for the political inaction to reduce the fragmentation of the euro area financial markets. This is directly related to the political decision to postpone for at least four years the enactment of the real Banking Union. Undoubtedly, this historic error will delay the resumption of Europe’s economy for at least as many years.

 

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

UN chief sends condolences to families of Malawi flood victims

Food safety: Enhancing consumer trust in EU risk assessment and authorisation

This company helps women to become solar entrepreneurs

Continuing incarceration of women’s rights activists in Saudi Arabia, ‘reprehensible’: UN experts

7 simple steps we can all take to reduce food waste

Globalization is changing. Here’s how your business can adapt

The rise and rise of media on your mobile phone – in one chart

The impact of COVID-19 on the life of the elderly

UN spotlights digitization of audiovisual archives to preserve human history on World Day

Central Africans ‘need our help now’: UN’s deputy relief chief

UN human rights report cites ‘multiple root causes’ of deadly Chile protests

3 important lessons from 20 years of working with social entrepreneurs

Employment: Commission proposes €1.6 million from Globalisation Adjustment Fund to help 400 workers made redundant in Carrefour Belgique

Support ‘winds of change’ in DR Congo to consolidate positive developments, urges UN mission chief

What we take for granted: The EU is not perfect

Healthcare workers’ safety: a forgotten necessity

As COP25 goes into the night, Guterres calls for more climate ambition

European Commission registers Χαλλούμι/Halloumi/Hellim as a Protected Designation of Origin (PDO)

G20: Less growth, more austerity for developing countries

Germany resists Macron’s plan for closer and more cohesive Eurozone; Paris and Berlin at odds

WEF Davos 2016 LIVE: “Chinese economy has great potential, resilience and ample space for policy adjustment”, China’s Vice President Li Yuanchao reassures from Davos

Millions denied citizenship due to ideas of national, ethnic or racial ‘purity’: UN rights expert

Paris, Washington, IMF against Berlin and ECB on money and interest

Myanmar: New UN envoy offers to serve ‘as a bridge’, recognizes ‘positive steps’ over Rakhine state

Guinea-Bissau spotlights threats of organized crime, Sahel terrorism in speech to UN Assembly

COVID-19: What you need to know about the coronavirus pandemic on 4 January

Palm Oil: With Malaysia cracking down on production, what’s the alternative?

A Monday to watch the final act of a Greek tragedy; will there be catharsis or more fear?

Data exchanges: Strengthening Europol cooperation with non-EU countries

Migration and rule of law on next ACP-EU Parliamentary Assembly agenda

Violence on the rise in Darfur following Sudan military takeover, but UN-AU peacekeeping mission maintains ‘robust posture’

This is why retail is such a sore point in India-US trade relations

President David Sassoli to visit Skopje: “Remain on the European track”

Former Chilean President Bachelet put forward by UN chief as next High Commissioner for Human Rights

How to keep essential value chains moving during the COVID-19 crisis

Mergers: Commission opens in-depth investigation into proposed acquisition of Metallo by Aurubis

A small group of world leaders are standing together against inequality

EU budget 2019 approved: focus on the young, innovation and migration

Forget 2009, this is the real credit crisis of our time

Energy Union: deals on efficiency targets and governance

UPDATED: Thousands flee fighting around Libyan capital as Guterres condemns escalation, urges ‘immediate halt’ to all military operations

New seat projections for the next European Parliament

The new era of Matriarchy?

4 ways to keep the momentum rolling on mental health

Services are the hidden side of the US-China trade war

Spring 2019 Economic Forecast: Growth continues at a more moderate pace

Visa-free access to the EU for UK nationals and to the UK for EU nationals

Top officials say UN will support Bahamas’ rescue, relief efforts as Hurricane Dorian churns in Atlantic

Budget Committee backs €2.3 million worth of aid to help 550 redundant media workers in Greece

Human rights on film: International festival celebrates mobile phone films for a cause

EU fight against tax-evasion and money laundering blocked by Britain

World Population Day: ‘A matter of human rights’ says UN

Ahead of UN summit, leading scientists warn climate change ‘hitting harder and sooner’ than forecast

The invisible L word: the struggles to achieve SRHR, as HIV/AIDS prevention and treatment for lesbian population

To solve the climate crisis, we need an investment revolution

‘Great Pacific Garbage Patch’ clean-up project launches trial run: UN Environment

Parliament votes reform for better European Co2 market but critics want it sooner than later

How COVID-19 accelerated the shift towards TradeTech

Why the UK government must do more to boost green revolution

On Brexit: the outcome of UK elections next May to be based on false promises?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s