Previous posts argued that QE programmes in the US, UK and Japan gave little boost to broad money growth, helping to explain their disappointing economic impact. Early indications are that the current Eurozone programme is proving similarly ineffectual.

Monthly growth of broad money M3 averaged 0.4% over March-May, unchanged from the previous six months (QE started in early March).

The earlier posts argued that the QE impact on broad money was small for two main reasons. First, central bank bond purchases were partly offset by sales, or reduced buying, by banks. This demand reduction was a direct result of QE – banks had less need to hold liquid securities because QE was boosting their reserves. Secondly, QE encouraged capital outflows – some of the money created, in other words, flowed abroad.

These effects are evident in the latest Eurozone data. Banks sold €25 billion of government securities over March-May versus ECB purchases of €147 billion. By contrast, banks bought €40 billion in the six months before QE started.

The first chart shows six-month M3 growth and the contributions of the various credit counterparts. The “government contribution” shows the net effect of ECB and bank transactions in government securities (as well as changes in direct lending and government deposits). This is positive but lower than in December / January. Banks’ net external assets, meanwhile, are now acting as a drag on broad money growth, having been strongly expansionary in 2013-14. This implies that the (non-bank) capital account of the balance of payments has moved into substantial deficit, offsetting the large current account surplus.

The biggest contributor to M3 growth recently has been a reduction in bank’s longer-term funding. Holders of maturing bank bonds have been reluctant to reinvest because of the paltry yields on offer. The fall in yields probably reflects the ECB’s interest rate cuts last year and global trends, rather than QE.

While QE has failed to provide an additional boost, monetary trends continue to suggest respectable economic prospects. Six-month growth of real M3 and M1, however, has fallen back as inflation has recovered – second chart.

The country breakdown shows a further rise in growth of real M1 deposits in core countries but a decline in the periphery – third chart. There was a notable slowdown in Italy, while growth rose in Germany and remains strong in Spain and France, though lower than last month – fourth chart.

• Financial crises in peripheral / emerging economies are often symptomatic of tightening global liquidity conditions.

• However, Greece has lacked market access for many months and its crisis reflects the government’s voluntary decision to reject an EU / IMF support programme.

• The global real narrow money growth measure tracked here has slowed recently but remains solid and well ahead of industrial output expansion, implying “excess” liquidity.

• The US and Chinese economies appear to be regaining momentum after weakness in early 2015. The Eurozone is growing moderately while Japan has slowed after a strong first quarter.

• Greece’s recession will now deepen significantly and capital controls may remain in place for months.

• The direct economic and financial implications for the rest of Europe are negligible, reflecting the small size of the Greek economy and the shift of financial exposures to official creditors.

• The main risk is political contagion, i.e. that a perceived unjust outcome for Greece increases support for anti-EU parties in other countries. Spain and Portugal hold important elections later this year. However, Greek economic hardship may cause other electorates to become more risk averse. The euro remains popular across EMU countries, even where the EU is not.

• The Greek government has called a referendum for 5 July on EU / IMF proposals that have now been withdrawn. The government will campaign for “no” but nevertheless expected the EU / IMF to provide additional financial support this week. This was refused and the ECB has frozen emergency liquidity assistance (ELA) to Greek banks, resulting in their closure until the election.

• “Grexit” is still not the most likely scenario. Greeks will probably vote “yes” to signal their desire to retain the euro. The current government would probably then fall, resulting in a temporary “national emergency” coalition or new elections. Negotiations on a new deal would be difficult because the current Greek government has squandered any remaining goodwill and a magnified recession will inflict further damage on public finances and the banks. The ECB would keep ELA frozen until a deal was concluded, requiring capital controls to be maintained. The government would probably be unable to meet some spending commitments, issuing IOUs instead. An eventual deal would keep Greece in the euro and allow a slow lifting of capital controls, as occurred in Cyprus after its 2013 crisis.

• The initial reaction of bond markets to the Greek news has been smaller than feared, with 10-year Italian and Spanish spreads over Germany widening by about 30 bp. This partly reflects confidence that the ECB will modify and / or expand its QE programme to provide additional support for peripheral markets if necessary.

• The suggested scenario here, therefore, is that Greece will remain a source of negative news for the foreseeable future but the wider market implications will be limited because of a benign global liquidity / economic backdrop.