Credit Crunch in Spain: Credit Expanding at Lowest Rate in Relation to GDP Since 1970

ECB president Mario Draghi has his work cut out for him. Not only is Draghi foolishly fighting price deflation, credit in Spain is on the deepest plunge compared to historical averages since 1970.

Via translation from the El Confidencial article Credit Does Not Flow.

The current weakness of lending in Spain is even more worrying if put in relation to its historical trend. If you compare the level of credit as a percentage of the economy with this trend, we are at the lowest level since data exists.

The Bank of Spain notes this reality as one of the arguments for not requiring a greater capital cushion banks; that is, to argue that now there is no risk that the credit excess causes a crisis like the one experienced after the housing bubble. To measure the flow, the Bank of Spain uses a complex indicator called “credit gap” which basically measures the evolution of financing to GDP with the historical average of this relationship.

The “gap” was -57.7 percentage points in September 2015 (meaning that credit to GDP is that far below its average). This is the lowest level since 1970, with a further deterioration from -54.3 points in the previous quarter.

The average of this indicator is +2.1 percentage points. Between 1999-2008 the measure stood at 30.7. Its record high, reached during the peak of the bubble, is 45.4 points.

How much farther to the end of deleveraging?

The question is whether there is much ahead to that end deleveraging and credit can regrow in net terms. As reported by El Confidential, credit to large companies is still falling hard.

The Bank of Spain says the gap proves there is no need for the ECB to require banks to have capital. I strongly disagree. Moreover, Mario Draghi’s attempts to force banks to extend more credit to customers who really have little demand for it, will simply create more bank loses.

Mike “Mish” Shedlock