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Has the European Central Bank Defeated the Sovereign Debt Crisis Once and For All?
A three-paneled chart reveals whether the critical precondition for recovery, consumer borrowing, is underway in Europe.

By Nico Isaac
Thu, 21 Mar 2013 17:15:00 ET
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Last September, while traveling abroad in Europe, I overheard a conversation between two tourists. They were discussing a front page article in The Times about a London man who had woken from a six-year long coma. The first passenger felt terribly sorry for the man, “Poor bloke,” she sighed, “He missed so much he can never get back.”  

But the other passenger strongly disagreed. He was almost envious, explaining:
 
“The man had the good sense to check out before the financial boom went bust. And now he wakes up just in time for the whole eurozone meltdown to be over. For him, it’s as if the worst crisis since the Great Depression never even happened.”
 
The conventional wisdom would have to agree. Every polled financial pundit from here to the Hellenic Republic insists that – while not totally out of the woods – the worst of the eurozone economic crisis is in the rearview.
 
The universally recognized date for the Continent’s exact turning point is July 2012. That’s when European Central Bank President Mario Draghi tossed his tie over his shoulder to verbally put the naysayers in their place:
 
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
 
The “whatever it takes” is a three-sided blitz of accommodative monetary policy, including:
 
·         One: Record low interest rates.
 
·         Two: The European Financial Stability Facility, which provides emergency lending to countries in financial difficulty. Of it, a 2012 news sources writes:
 
“European Central Bank To the Rescue. The ECB rode in as a white knight by agreeing to buy large amounts of bonds from countries with shaky finances, including Italy, to calm a contagion of fear then sweeping the eurozone." (The Sacramento Bee)
 
·         Three: The Long Term Refinancing Operations of 2011 and 2012, in which the European Central Bank purchased bad government bonds and reissued them to banks at bargain basement rates. Here, Draghi himself extols the LTRO’s restorative power:
 
“We took care of the risk of default with the two big LTRO’s, where we injected half a trillion of net liquidity into the euro area banks. We took care of the [risk aversion factor] with that.”
 
If anything, that “half a trillion” figure is grossly understated.
 
So, the question remains: Has it been “enough”? Are central bank officials correct to claim that the biggest reflationary effort in Europe’s financial history has “taken care” of the crisis?
 
Well, since the time of Tulip Bulbs, there has been one critical precondition for recovery after a credit-fueled contraction; namely, record low interest rates and monetary stimulus brings about a rise in borrowing.
 
In other words, flooding the monetary system with liquidity is only one part of the recovery equation. If newly recapitalized banks use that money to repay their own debt, the effort fails. If they squirrel it away into safety reserves, the effort fails. ONLY when that money is recirculated as loans to consumers and businesses will the effort succeed.
 
And, in the March 2013 European Financial Forecast, we reveal whether this key borrowing component is, indeed, present via the following chart. From top to bottom, it shows outstanding loans to non-financial eurozone corporations, the month-over-month change in outstanding loans, and growth of loans in euro-area households since 1998.  
 
 
 



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