Nic Lenoir On Why The Euro Is About To Crash And Burn, And Why His Concern For The "New Normal" Is Not Slow Growth But Civil War

Tyler Durden's picture

From Nic Lenoir of ICAP

Today 6 countries in Europe were the theater of riots. I highlighted in the past that voting turn-out has been on the rise in the past 8 years after a steady decline the 3 previous decades. During the credit boom fat and happy citizens had no time to vote, too busy producing or even more so consuming. Now with unemployment through the ceiling and poor economic perspectives people have started voting again. The next step is that they realize that no one in the political spectrum currently has any guts or brain and therefore no one offers a real credible fair solution, at least for now. When they do they burn things up. Because things are a little worse in Europe economically, and because the people there actually do realize the people in power are monkeys, they have now reached that stage of realization where burning things up is the logical response. Don't think the US will remain immune to this symptom of the new normal (unlike El Erian I have not revised up my forecast, and my concern is not slow growth but civil war). For proof there was a viral video going around yesterday with a man threatening a school board with a gun after his wife lost her job, and it sadly ended in a shooting. Sadly I have very much expected these incidents to become common place and it is certainly going to get a lot worse. I almost wonder if the most fair, clairvoyant, charismatic, and pro-active politician could help us prevent true chaos. I suppose the real question is will someone come along directing the blame abroad to deflect the anger of civil unrest towards an international war. Do not shoot the messenger, I am simply outlining what I consider the most likely scenario. I pointed out in 2008 that the two biggest market crashes of the 20th century were 1907 and 1929... it does not take a genius to do the math.

Looking into what chaos will look like for the financial markets, the elephant in the room is the Euro. The only way it survives in any form is if countries start defaulting. Until then the problem will not go to rest. I strongly believe that defaults are much like treating generalized infection by cutting the worst looking limb. The problem is at the core, in the way it is designed: you cannot manage drastically different economies of countries with dramatically different cultures and laws using the same currency and interest rate curve. Defaulting takes care of the current debt accumulation by poorer countries trying to keep up with the Euro (not benefiting from the tailwind of currency debasement to boost prices in nominal terms they accumulate debt). However the fact is they will find themselves in the same predicament in 30 or 40 years at the latest for the same reasons. But by the same token I do think defaults are necessary, whether it is via outright haircut on debt repayment or by breaking up the Euro with the debt being re-nominated in original currencies using the Euro conversion, in which case a subsequent and immediate currency bloodbath for the PIIGS would be the defacto default.

The problems in the Eurozone will not go away, all the temporary fixes European politicians are trying to throw at the problem are less and less effective, because the market sees that the Euro itself is broken, and so the placebo effect has a shorter and shorter life cycle. For that reason I pointed out last Friday and Monday that because sovereign CDSs in Europe were close to their widest levels still and US swap spreads had tightened back to their lowest levels since the Greek episode in the European saga, it was time to buy 2Y swap spreads. We have seen quite a bit of widening since I first brought it up already, but nothing compared to what I ultimately expect. Of course FRA/OIS spreads are blowing out in tandem. Interestingly it's no the case for the EUR curve. While counter intuitive in theory, this comes from the market structure of the debt markets. European banks have loan portfolios (unsecuritized) they need to fund in USD, and those can't be pledged against EUR deposits or to a central bank. The ECB has also quite a few schemes allowing almost any toxic junk to be pledged to them for cash. Zerohedge had a very interesting observation the other day that the leverage of the ECB is about 6 times that off the Fed. That's about the only thing that makes the Fed looks good. Also the shadow banking system is a lot more developed in the US than in Europe, so when things freeze it picks up momentum and dimension a lot faster in USD than EUR. For all those reasons, USD Libor settings were a lot more sensitive to market conditions during the Greek crisis than Euribor settings. Expect the same this time around. The attached chart of the 2nd IMM FRA/OIS in USD and EUR shows it more clearly than words could.

However it does not mean there are no traces of the damage in European Fixed Income. I have added to this email a spreadsheet where I calculate the "average" eurozone government yield curve using debt-by-maturity compounding. That gives us a quick way to see who are the countries borrowing cheaper than average, and who are those borrowing at a higher cost. Using that logic if we assumed the market premia for the overall debt-load of Europe remained constant if debt was socialized at the Eurozone level, it would cost 17Bn Euros a year to Germany and almost the same to France to keep the PIIGS in the union. If you don't think it sounds so bad, try to think what people in the US would say if Congress voted a $100Bn a year aid to Mexico. I am not sure what the current duration on a perpetual bond is, but it is equivalent to well over a trillion aid package. Not something people should take lightly.

Using these results I also looked at the spread between 2Y OIS (or EONIA fo Europe) and the 2Y government yield (or the 2Y average "Eurozone" sovereign yield). There you see the full damage much more clearly. While 2Y OIS and 2Y US Treasury yields are within 10bps of each other (mispriced? selling US treasuries against OIS is surely a great low carry fat tail insurance!), 2Y average sovereign yields trade over 120bps above EONIA. So if you are not seeing those Euribors getting crushed i tandem with the frnt Eurodollars on this move, you can see that dynamic is the same in terms of fundamental, but market structure and balance sheets mean the mole pops out of another hole. It is a legitimate question to ask whether Euribor settings should set higher. I am working on a combined average CDS for European banks contribution to Euribor weighted by market cap as I intend to show that the Euribor setting in its current form is useless and it should be modified as ultimately it is never good when your benchmarks are completely detached of the reality. But that last bit is for another day.

Good night and good luck trading,


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MacedonianGlory's picture

The Old Regime is about to take power.

CH1's picture

Very interesting comment, Macedonian. Care to provide some detail? Thx.

Cleanclog's picture

Actually, hate to post this, I was in Montenegro and Bosnia 2 months ago.  People in Bosnia - especially north of Sarajevo - are exhibiting much more hostility than I witnessed 5 years ago.  Big divides on use of language, what is being built, by who, with what funds and support.  Really evident.   I hope it will not lead to war, but I am not optimistic.  But I think revolutionary style war (the skirmishes are already under way) is coming in the Balkans again and perhaps along Mediterranean Europe.

CrackSmokeRepublican's picture

The EU was a Jew Rothschild Project pre-WWII.

The Euro will disappear like Jew Bolshevik Communism and Jew "Diversity".

Keep and eye open and a gun loaded...--CSR

English translation of selections of
"Practical Idealism (Praktischer Idealismus)"

By Count Richard N. Coudenhove Kalergi - published in Vienna 1925.

-Hidden by the European Movement-

Europeans to become negroid mongrels

The man of the future will be a mongrel. Today's races and classes will disappear owing to the disappearing of space, time, and prejudice.

The Eurasian-Negroid race of the future, similar in its outward appearance to the Ancient Egyptians, will replace the diversity of peoples with a diversity of individuals. [22]


Count R. N. Courdenhove-Kalergi is seen by many as the father of the modern European Union. It was him who suggested Beethovens hymn as the EU's national anthem, and was very active in connection with the design of the EU logo which contains 12 stars which symbolize the 12 tribes of Israel. The logo was finalized by the Jew Paul M.G. Lévi. 2)

Otto von Habsburg was Coudenhove-Kalergi's successor as president of the Pan European Union. He is a honorary professor of the University of Jerusalem, and recipient of the 'International Humanitarian Award', of the 'Anti Defamation-League' (ADL) of the Jewish B’nai B’rith Masonery Lodge.

Coudenhove-Kalergi's father was a close friend of Theodor Herzl, the founder of Zionism


Coudenhove-Kalergi in his autobiography:

"At the beginning of 1924, we received a call from Baron Louis de Rothschild; one of his friends, Max Warburg from Hamburg, had read my book and wanted to get to know us.

To my great surprise, Warburg spontaneously offered us 60,000 gold marks, to tide the movement over for its first three years ....

Max Warburg, who was one of the most distinguished and wisest men that I have ever come into contact with, had a principle of financing these movements.

He remained sincerely interested in Pan-Europe for his entire life.

Max Warburg arranged his 1925 trip to the United States to introduce me to Paul Warburg and financier Bernard Baruch."

Finance theorist Ludwig von Mises (supported by a grant from the Rockefeller Foundation) also participated in Coudenhove-Kalergi's Pan-European Movement.

Later von Mises disciples Arthur Burns and Milton Friedman spread von Mises ideas through a network of secret 'conservative' think tanks, led by the Mont Pelerin Society.

CrackSmokeRepublican's picture

Z.H. needs to get a "Flag as Truth" button... This isn't Junk unless you are Z.H. Jew. LOL...

AnAnonymous's picture

Big divides on use of language, what is being built, by who, with what funds and support.  Really evident.


That is indeed the major difficulty in the project. People are comfortable in their group and while ascending to a new group in formation might prove profitable, it is all about to know who is going to get what. People want to be better in their new group than they were in the  previous.

The english are comfortable in the English group as they are number one in it. Same for Germans and so on.

The new European group might provide better opportunities. Think of Germans, they will be able to push away their  previous (mis)deeds by claiming the Germans did it, not the Europeans. And they are Europeans now... You see the trick. Good old change in identity style.

Problem in the Balkans is that they are a bunch of minorities. Usually, in transformations like that, the majority use minorities to alleviate their fear, making sure that minorities have to eat the most of the negative sides of the transformation. Hard to perform when you have no  real minorites on your soil.

Spitzer's picture

Its all bullshit.

The Euro was designed to replace the dollar by floating gold MTM. Oil will be priced in Euro's when the paper gold market dies(COMEX,LBMA,GLD). Book it.

Long live the Euro

westboundnup's picture

It says alot that if we are to have a civil war, I hope it's along the lines of the U.S. Civil War (the bloodiest in the nation's history), 2 organized armies meeting on the field of battle.  I fear it may be like Madrid circa 1937 in the Spanish Civil War. 

Simon Endean's picture

There was a lot more violence going on other than just the massed armies meeting up.  There were plenty of small-scale battles and such, and they started well before Fort Sumter and went on well after Appamattox.

Freebird's picture

Celante forecasts literal blood in the streets 2012 ..
coming to your local mall. ( Not necessary for any red
neck cowboy gunslinging, check out my Uzi bitchez comments thank you.)

ZeroPower's picture

Come on man. The GBP (hell, the CAD) are more 'reasonable' replacements than a doomed currency. Do you actually see a country in the EU defaulting? And do you see this event leading EU out of their current mess? I would like to understand your stance.

Spitzer's picture

The commercial banks inside Europe don't influence the integrity of the currency as much as people think.

The Eurosystem gets swap lines from the Fed and bailouts from the IMF.  When a run on the US dollar finally starts, the Euro can default without the worry that people will be running form the Euro to the dollar. All the while, the international liquidity reserves of the Euro (gold) will be going to the moon.

nonclaim's picture

It doesn't make sense unless by "going to the moon" you mean something along the Zimbabwean style...

Spitzer's picture

The dollar will go zimbabwe style which will send gold/ECB balance sheet to the moon

Freebird's picture

Gotta watch those fx swaps, primary dealer frontrunning at
its finest..

IQ 145's picture

 What a funny statement. you must be joking.

I think I need to buy a gun's picture

i agree.....and thats the sense i get from others who have called this entire crisis

TBT or not TBT's picture

Yep, with europe's deathbed demographics, rising anti-western immigrant population, and their entitlement mentality, they'll dominante all right.   Dominate the news that is.   Being that what bleeds, leads.

dogismyth's picture

Its the Jesuits dammit!  Read up on the black pope.  In fact, google it and read the first article.  Wowser.

velobabe's picture

civil, bitches†

Jason T's picture

Lyndon LaRouche has been saying that by Christmas, the Euro will be dead.  But also that without a Glass Steagal type reorganization of the banks and national credit systems, we get a new dark age.  


Seeing what is happening in Greece, Rome, London, Ireland, so forth.. it's not that far off to believe that the global monetary system has the potential to collapse.

Spitzer's picture

we get a new dark age


The elite are moving to gold via the Euro/freegold. The Elite know the dollars flaws.

IQ 145's picture

 Moving to gold via the Euro; it sounds like it means something; but I can't quite see what it would be.

kubrick007's picture

go here and read for about 2 days, it explains it all:


while your reading, transfer cash to an account so you can wire money to apmex because the second you are done reading it that is what you will immediately want to do.

I think I need to buy a gun's picture

i agree with everything spitzer is saying tonight. the garbage media over here makes it sound like they are in huge trouble but its only a few countries and they will either be shaved off or have substantial gold we don't know about.

Calmyourself's picture

That scenario does not preclude a new dark age.  I believe elites were represented in the last dark age.

dussasr's picture

I would not be quoting Lyndon LaRouche even if his views temporarily aligned with my own...

Gubbmint Cheese's picture

6 countries? Italy.. Greece.. where else?


JohnG's picture

Greece was paralyzed by a general strike and violent protests on Wednesday and trade unions staged demonstrations in France, Spain, Belgium, Luxembourg, Denmark and the Czech Republic against government austerity measures one day ahead of what promises to be a fractious European Union summit to agree on a permanent mechanism to handle future debt crises.,1518,734811,00.html


cswjr's picture

So, here's a question: PM have been tracking the EURUSD.  When one of the nations in Europe (finally) blows up, do PM go up as a flight to quality, or down the toilet with the Euro?

tmosley's picture

Paper and physical diverge sharply.  Paper goes down with the Euro, physical goes to the moon.

This process has already started, as aggressive buying of physical has forced gold and especially silver retailers to raise their premiums.

Spitzer's picture

ECB Assets (as at January 1, 1999):

1. Gold - €99,598,000,000
2. Foreign currency claims outside the Eurozone - €230,342,000,000

Total reserves at ECB MTM concept innauguration - €329,940,000,000
Gold proportion of the Eurosystem's reserves on Jan. 1, 1999 - 30% (30.19%)

Conclusion: During the last decade of the Bretton Woods "experiment", 1958-1968, gold failed to produce new international liquidity and fell from 66% --> 51% as a proportion of international reserves. But during the FIRST decade of the Freegold (ECB MTM FLOATING gold price) "experiment", gold has risen from 30% --> 60% of the Eurosystem's (international liquidity) reserves.

Think on this one for a while. It deserves at least that.

1958-1968 - 66% --> 51%
1999-2010 - 30% --> 60%

And where do you think it might be going?

1999-->2010-->201_ - 30% --> 60% --> 9_%?

THE DORK OF CORK's picture

If you divide the Euro Gold reserves into the M1 money supply you get roughly 13.5 thousand Euros a ounce.

You even have to more then double the Euro gold price to cover the physical notes in circulation.

If you take a more conservative gold standard encompassing M2 which in Europe encompasses M2 you get a even larger number........

The Euro is a hyperinflationy dog - the ECBs function was solely designed to transfer wealth to the ruling classes via monetory hyperinflation and subsequent asset price inflation - enriching its clients.

Its going down baby - the malinvestment has been epic in scale.

We have had no major war yet the west is finished - UNFUCKINGBELIEVABLE

Spitzer's picture

who ever hyperinflates first loses.

My bet is the dollar, look at the swap lines to the ECB and the bailouts from the IMF. Looks like dollars are getting printed to me, not Euro's

THE DORK OF CORK's picture

Whether the money is lost on a via default or is hyper inflated into infinity it needs Gold on the other side of the balance sheet.

In the great scheme of things it does not matter wether you do a Ben B or a Axel W.

The Loss was incurred when they made loans to non productive non capital forming ventures.

The west has been destroyed by monetarists that believe that money is not a energy token - they will be proven wrong.

The malinvestment has been epic - we had all the money for Holidays on the Med yet Nuclear power plants were too expensive as they were capital intensive so we ran down capital instead as in this system all money must be spent.

I have recently gone from bearish to uber bearish - the "authorties" either do not understand the problem or want the 4 horse men to come and finish it.

Dr. Acula's picture

"money [is an] energy token"

That's stupid. Energy has no special place in the science of economics. The only thing dumber than your phrase is the absurdity called EROEI. It is impossible to grasp economics by playing childish games with physical quantities.

Jasper M's picture

It can be argued that economics is a special case of ecology, which is, in turn, a special case of thermodynamics. So money Is an energy token, just with the details (unfortunately) overlooked.

Dr. Acula's picture

To say $1 is an energy token because it can be traded for energy is specious. A unit of money can with equal justification be called a cheeseburger-token or tchotchke-token.

To say $1 is an energy token because the unit of currency contains energy is also absurd. Because then a $1 gold eagle would not be an energy token - there is no way to extract energy from them. Electronic money does not even have rest-mass energy.

AnAnonymous's picture

To try to measure anything with money  is specious.

That is the issue. Money cant measure anything. That is where the problem is.


By the way, cheese burgers are energy.

johan404's picture

Ok. How do any products get manufactured or services get provided without energy? If I put a $1 bill in my gas tank, will my car run on it? Money represents the ability to do work and produce goods, energy (oil) is the ability to do work and produce goods. You are clearly retarded and think industrial goods are made and transported with magical pixie dust, or you are a troll.

THE DORK OF CORK's picture

 I give up - but before the lights go out I must endeavor to buy some slaves while they are still cheap.

Tell me Dr.Acula  what is the name of the free energy planet that you hale from ?