Shifts in credit trends point to depth of German economic stagnation, budget problems in Italy.
The 'True-Sale Initiative' launched last week in Germany by the Reconstruction Credit Bank (KfW) and commercial banks is a watershed for German banking. Despite the rhetoric to the contrary it certainly indicates the depth of problems in financial sector balance sheets and thus the extent of damage in the underlying economy.
The TSI also amounts to an official endorsement of disintermediation and is thus a breach of the German 'house bank' system of post-WW2. The reality is that private banks have stopped lending to medium-sized firms and are exiting the sector, leaving the financing of the manufacturing economy to savings and cooperative systems. This is reflected by the 2%y/y rate of private sector credit growth in Germany, far below euro area partners.
Meanwhile, the extent of the Italian government's use of asset-backed securitisation as one-off plugs for the state budget is unprecedented. In late 2002 it distorted national credit trends and is causing considerable concern in the European Commission amid its monitoring of fiscal balances under the Stability and Growth Pact (SGP).
SummaryAsset Conclusions: German TSI move shows very tough credit conditions in German manufacturing; Italian medium-term Stability plan also Suspect.
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© Graham Bishop
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