Recap 12-6-12: On European Credit


Over the past few months, interest in loaning to EU corporations via hedge fund and private equity has been substantial. There appears to have been multiple fund launches with EU loan mandates, and anecdotal reports suggest that competition for loans to corporations with good fundamentals has already started to intensify. It is interesting to note, however, that almost every single one of these funds will be making loans in the UK and Northern Europe – and avoiding the periphery countries that need credit the most, and presumably, where the most attractive opportunities lie. Why is that the case?

I had a chance to pose this question to a manger today. The reason, it appears, is the court systems in the periphery and France. In particular, the wide latitude given to judges in those countries regardless of contract specifications, along with the backlog of cases, mean that not only is the recovery rate in the event of a default uncertain, but the timetable for the recovery as well. For a PE or Hedge fund with a defined capital lockup period, this is simply an unacceptable financing risk. So despite the attractive returns offered for loans in the periphery, credit growth has been tepid. And that is unlikely to change anytime soon.

In aggregate, this supports the hypothesis that the growth differential between the EU core vs periphery will continue.

Separately, here is why you should buy stocks or mutual funds the day before quarter end: (h/t Big Picture)


  • Both the BoE and ECB left policy unchanged as expected.
  • Draghi:
  1. Rate cut was discussed, but the consensus was for no change. “Operationally” the ECB is ready for negative rates.
  2. ECB expects activity should gradually recover over 2H 2013.
  3. Forecasts 2013 growth revised down to between -0.9 to +0.3%
  4. Inflation forecasts also revised downwards. Expects 2013 inflation between 1.1% and 2.1%.
  5. in September … M1 growth accelerated to 6.4% from 5.0% … These developments are partly due to a specific transaction leading to an increase in overnight deposits belonging to the non-monetary financial sector. At the same time, deposits from households and non-financial corporations also rose in October. Overall, more observations are needed to distinguish between shorter-term volatility and more lasting factors.
  6. Unlike in the case of monetary developments, there has been little change in credit growth. The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) remained at -0.4% in October, unchanged from September. But this development reflects further net redemptions in loans to non-financial corporations, which led to an annual rate of decline in these loans of -1.5%, down from ‑1.2% in September. The annual growth in MFI lending to households remained unchanged at 0.8% in October.
  7. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed.

US Jobless Claims declined to 370k last week vs 380k exp and 393k prev

Australia Employment increased 13.9k last month vs 0 exp. Unemployment declined to 5.2% vs 5.5% exp and 5.4% prev

Upcoming Data:

  • Fri: US Employment, Canada Employment
  • Mon: China Data, Japan Current Account, Eco Watchers Survey, German Trade Balance, EU Sentix Investor Confidence, Canada Housing Starts
  • Tue: German Zew, USDA Ag report