Lack of credit hits eurozone investment
Following the collapse of the financial sector in 2008, investors became very risk averse with the bulk of money being put on deposit or into other safe haven flows. The eurozone debt crisis which flared up in 2010 exacerbated this trend.
However, the speech by ECB president Mario Draghi in Jul 2012 in London when he said he “would do whatever it takes to save the euro” allayed concerns about the imminent unravelling of the single currency.
Over the past 12 months, there has been a steady flow of investment funds into equities and property as investors become more risk averse, in part driven by low interest rates as central banks pursue loose monetary policy. But chief European strategist with the US hedge fund, Trend Macro, Lorcan Roche Kelly, says there will have to be a considerable improvement in credit conditions across the eurozone before there can be any sustained upturn in either equities or the property market.
“The headline figures such as the PMIs and the tightening of spreads between core and periphery countries make things look better than what they are,” says Mr Roche Kelly.
Even though there has been a stabilisation of the eurozone crisis, there will be no region-wide recovery until the banks start lending again, he adds. Data shows that eurozone bank credit is still contracting.
Surveys show that SMEs, which are the main engine of economic growth, have problems accessing credit at sustainable rates, particularly in periphery countries.
One possibility is that banks are reluctant to lend before the new EU Banking Union becomes operational in 2014.
Mr Draghi is expected to address the problem of fragmentation of the eurozone financial markets at today’s monthly meeting. However, his options are limited before the German elections scheduled for later this month.
