“According to ABI the value of total loans issued, 1.467 billion euros, represented a 2.5% drop on the December value and was largely the result of the continuing recession in Italy.

“Meanwhile, for the current year ABI researchers said their forecasts of a 0.6% contraction in the economy would likely be revised for the worse after a higher than expected contraction of 0.9% in the fourth quarter of 2012. On this basis, and unless the government takes any measures to stimulate growth, the economy could be on track to shrink by about 1%, ABI said.” [emphasis added]

http://www.ansa.it/web/notizie/rubriche/english/2013/02/19/Italian-bank-lending-drops-record-low_8274668.html

What exactly, then, is all of this?:

And let’s not forget the ECB’s unclogging of monetary transmission channels since July:

As I mentioned in a previous post, high debt equates to over-financialization. The correlation of economic weakness (that is always “unexpected”) and over-financialization, over-indebtedness is just a symptom, is far more definitive toward figuring out the persistent economic dysfunction in Italy and beyond. What dearth of stimulus is Italy so tragically experiencing?

It runs across the continent:

Composite PMI in the Eurozone, February 2013 47.3, down from 48.6

“Output fell at faster rates in both manufacturing and services, though trends were once again markedly different by country. Output rose for the third month running in Germany, albeit at a slower rate, contrasting with accelerating, steep rates of decline in both France and across the rest of the Eurozone on average. French businesses were particularly weak, reporting the largest monthly drop in output since March 2009.”

No lagged stimulus effects appear either:

“New orders fell for the nineteenth month running, with the rate of decline gathering pace having eased to the weakest for 11 months in January.”

The improvement in Germany over the past few months appears to be coming at France’s expense (and we have seen anecdotal evidence to support this). At some point this becomes Germany vs. Europe (again).

The tension of the strengthening euro (for financial purposes to remove currency risk) against the need of the real economy (when every country’s answer to the question of lagging or flagging growth is exports) is a real danger here. If Germany and its export-oriented compatriots are able to talk the euro lower, which they are trying, we get back into fears over euro stability.

On January 25, 278 banks returned €137 billion to the ECB as the first annual LTRO repayment window was opened. That exceeded modest expectations of the time. The euro was 1.34 to the dollar, rising on its way to near 1.37 on February 4. Since then, amid currency war and export concerned chatter, the euro has dropped back to 1.316. Yesterday’s LTRO2 repayment window saw 356 banks return only €61 billion, half of what was expected expected (it bears remembering that the interest rate on the LTRO’s is essentially a penalty rate, and since the “money” is nearly euro for euro parked in either the ECB’s current account or deposit account these banks are receiving ZERO interest income, meaning that LTRO users are losing money on the carry, giving them a rather high incentive to get out sooner rather than later).

Of course, it is far too early to conclude anything, but there is more than a hint of a suggestion in all of these related data points. It is not just the dubious currency union that is strangling growth on the continent, it is the over-financialization and the hell-bent desire of monetary policymakers to preserve it. One (the currency) does not exist without the other (financialization), but the European real economy can (and would) survive and thrive without either. It’s not as if the current suite of policy “stimulus” is working, except to confound economist expectations and predictions while encouraging speculative price dislocations in almost every market.

Does that increasing price of the Italian 10-year tell us anything about the state of Italian financial or economic climates? Economists are constantly revising lower their estimations, but those once-vaunted bond vigilantes take it all in stride, only bidding (no sustained offering against the threat of the ECB’s SMP or OMT).

The dangerous intersection of this perpetual, petrified European dysfunction with the US dollar is the multi-hubbed banking system that aggregates liquidity in London. By position of being the current reserve currency, financial trauma in Europe is directly transmitted to US dollar asset classes. Europe matters.