By Greg Peel

By late 2011 Europe had endured two years of financial uncertainty and fear over Greek sovereign debt and general zone-wide contagion. At the same time, The European Banking Authority's (EBA) new 9% core tier one capital requirement with a deadline of June 30, 2012, was closing in. As the economy deteriorated and uncertainty heightened European banks reined in their lending, threatening to spark a second GFC-style credit crunch.

Perhaps the best thing that ever happened to Europe in late 2011 was the expiration of Jean-Claude Trichet's fixed term as president of the ECB. This opinion is personal, but I believe history will regard Trichet as a blind and belligerent fool. Of particular note will be Trichet's two shock ECB rate rises ? one in late 2007 in the first global credit crunch and the second as the eurozone's subsequent sovereign debt crisis gained momentum. Trichet stubbornly suggested the ECB's role was only to control inflation and not to act with regard to eurozone economic growth or lack thereof.

It is of little surprise that before the nameplate had even been changed on the ECB president's office door, newcomer Mario Draghi cut the central bank's cash rate. Draghi was alarmed at the deterioration in European credit markets and saw that further decisive action needed to be taken to both avoid another credit freeze and stabilise financial markets. Earlier the rest of the world had all but gathered outside Trichet's door chanting "Stimulate! Stimulate! Oh for the love of God, Stimulate!" to no avail, but in December Draghi launched his Long Term Refinancing Operation (LTRO) which involved the ECB handing out three-year funds at low rates to any European bank sticking up its hand. And there were hundreds of them, taking around E500bn of crisp, freshly printed euros (in effect).

December was only round one, and although global markets entered the new year feeling a little less afraid, the Greek issue still lingered. Draghi thus launched LTRO round two, handing out about another E500bn. Within two months the ECB had handed out around one trillion euros in TARP-style emergency funds, and suddenly Europe began to settle. The world breathed a sigh of relief, and bars in all the financial districts around the globe were filled with traders and brokers drinking a toast to the hero of the hour, one Mario Draghi.

If only Trichet had done the same two years earlier.

A report published by Danske Bank last night noted, "Today's data on monetary developments confirm that the ECB has succeeded in avoiding a credit crunch and has stopped the ongoing credit contraction but it is also evident that so far the ECB lending has not been passed on to the real economy".

The purpose of Draghi's monetary stimulus was not just to bolster the bank balance sheets but to provide a fillip for the eurozone economy. The banks were expected to take the cheap ECB loans and lend at higher rates into the economy, thus providing "gimme" profits for the banks and economic stimulus as a counter against recession. Of course this is exactly what The TARP was supposed to do too (the Fed and US Treasury stimulus response to the fall of Lehman). Yet US banks instead mostly hoarded the cheap funds and to this day they are still sitting on substantial piles of cash.

You can lead a horse to water.

Not only did the European banks need to save their backsides, they needed to get their tier one capital ratios up. A ratio increase can be approached from one or both sides of the balance sheet ? either assets (loans) can be reduced or capital can be raised. The EBA assessed in October last year that European banks would collectively need to raise E115bn, and requested banks not to lift ratios through excessive deleveraging (reduction in loans). It's all very well to make such a request, but shell-shocked European bankers were quick to tighten lending standards while hanging on to lots of that lovely ECB cash.

Danske notes, nevertheless, that regardless of tighter lending standards the demand for loans in the eurozone dropped anyway. And while the latest data show the ECB's money is not getting out into the eurozone economy, Draghi had always assumed a lag. At the March ECB press conference Draghi noted that "an ad-hoc survey for internal use showed that from the very, very negative trends in credit and money that we saw in the last three or four months of last year...there has been a modest pick-up in credit and bank lending since the first LTRO".

Looking at last night's data, Danske indeed notes evidence of a pick-up in money growth (M3) after three months of decline. M3 growth rose from 2.5% to 2.8% in February alone. The analysts concur with the ECB's expectations of a lag from the LTRO to lending growth in the economy and expects further positive evidence to materialise in coming months.

On that basis Danske expects credit in the eurozone to remain stable in the first half of 2012 before moderately expanding in the second half, thus supporting improvement in eurozone growth. Growth will unsurprisingly be disjointed nevertheless, with Danske suggesting a possibly significant pick-up in Germany contrasting with the peripherals which may well see further credit contraction.