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  • pudshaft pudshaft Mar 29, 2013 5:55 PM Flag


    The third type of contagion is one that no-one seems to be talking about. To understand it, imagine that people waiting-and-seeing just keep on waiting and never take action. Then there’s no contagion, right? Well, actually that’s wrong. It’s wrong because contagion doesn’t just work by causing people to take certain actions; it also works by causing them to refrain from certain actions. Like lending, for example. Tightening lending standards are a key piece of the vicious circle that’s currently in place in Europe.

    n a recession, this survey is like a quarterly and economic version of Groundhog’s Day. If it shows lending standards are still tightening, then expect “winter” to continue, because it’s folly to think economies will recover. Economies rise and fall with the rise and fall of credit, and if bankers tell you credit expansion isn’t happening, then economic expansion isn’t happening either. It’s really that simple. This is arguably the best leading indicator of all, even though it’s rarely noticed. For those optimistic forecasters who keep expecting a recovery and getting it wrong, their errors are probably best explained by not giving enough weight to lending standards.

    Getting back to stealth contagion, this occurs when people reduce their risk-taking activities. It has nothing to do with either buying an extra lock or being jumpy at night after learning of those burglaries I mentioned earlier. Think of it as a developer shelving his plans to build a high-end apartment complex because of the increase in local crime. And in the case of stealth contagion from Cyprus, bankers are the ones to watch. Bankers in the peripheral economies realize their deposit base is becoming less secure, even if they haven’t seen a significant rise in withdrawals. They’re doing the same calculations as the rest of us and concluding that risks are higher than they were before.

    So how significant is the stealth contagion effect? We’ll have a pretty good answer to that on April 24th. That’s the next release date for the lending standards survey. The ECB began to solicit responses in mid-March and will continue to do this through the early part of April, which means the survey should partly reflect the public mood as the Cyprus bailout has unfolded. And I predict it’ll tell us to expect more winter, but don’t just take my word for it. Mark your calendar for April 24th and plan to go straight to the ECB’s website. We may learn that the least talked about of the three contagion types is also the most significant.

    Lastly, here’s an article posted by Zerohedge and sourced from JP Morgan that lists other indicators that might foreshadow a change in lending standards. In a nutshell, other indicators to watch include excess cash in the Euro banking system (available daily), peripheral bank debt issuance (available weekly), Target 2 balances (monthly) and balance sheets of monetary financial institutions (also monthly).

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