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May 23, 2013

Two Charts Say ECB's ABS Plan May Fail

By Tyler Durden of ZeroHedge 

While many would argue that youth unemployment (the real scariest chart here), in fact we suspect it is the following two charts that are really keeping Mario Draghi up at night. The lip service paid by the French and the Germans to growth strategies and youth unemployment pale in relation to the desperation of the European collateralizer-of-last-resort to de-fragment his transmission channels and unleash his own QE to the starving banking systems of Spain and Italy. As BNP notes, recent data on Italian and Spanish banks’ bad and non-performing loans (NPLs) have reignited the debate on the health of the banking sector in the eurozone’s peripheral economies and its implications for the bloc’s credit supply and, ultimately, economic growth. But what is worse is that interest rates on new loans for a company in Italy or Spain are almost double those in Germany and France. It is against this backdrop that Draghi expressed plans to revive the ABS market - but implementation will prove significantly more challenging than market hopers believe (as is clear in credit markets) and direct purchases will probably face vetoes by a number of influential members of the board.

Via BNP, ...

The deterioration of credit quality and the resulting problems for the banking sector are not news in Spain. The implications for bank balance sheets of the plummeting construction sector were the main trigger of the country’s fiscal crisis. Conversely, in Italy, the sounder state of the banking system allowed it to better withstand the initial shock of the financial crisis. However, a double whammy of indirect crisis effects is now hitting banks in both countries. The rise in government bond yields and the downgrades of sovereign debt ratings have pushed up the cost of funding, while the contraction in GDP has led to a worsening of loan quality. 

Interest rates on new loans for a company in Italy or Spain are almost double those in Germany and France. With bank lending accounting for around 80% of the financing of the corporate sector in both Italy and Spain (the percentages are even higher for small companies, which find it harder to tap into alternative sources of financing, such as the capital markets), this is damaging firms’ competitive position and proving a significant obstacle to growth.

It is against this backdrop that we must view the ECB’s plans to revive the ABS market, as hinted at by central bank chief Mario Draghi at the last ECB press conference. Implementing the plan, we believe, may prove challenging.

Direct purchases would leave the ECB’s balance sheet vulnerable to credit risk and probably face vetoes by a number of influential members of the board. Other alternatives, like the direct involvement of the EIB, are more likely, but not free of problems, as higher levels of non-performing loans ultimately mean more risk.
Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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