The ECB-Driven Toxic Debt Loop At The Heart Of Europe's Misery

Tyler Durden's picture

Just as we will not tire of pointing out the unintended consequence of the Fed's central-planning efforts, so it is time, courtesy of the IMF's latest missive, to point out the vicious circle that the ECB has created and encouraged in Europe. The unintended consequence of the ECB's intervention - as both perpetual backstop and lender of last resort - has created an ever-increasing fragmentation between the core and the periphery (exactly the supposed 'issue' Draghi is attempting to fix with his OMT). The toxic-debt-loop as capital leaves the periphery for the core, pressuring peripheral bond yields/spreads, and forcing private sector borrowing to be replaced by public-sector not only clouds the true picture for real-money investors or depositors (risk-based pricing has been destroyed) but encourages front-running fast-money flows which do nothing but provide short-term cover for banks/sovereigns to delay the inevitable (and potential market-clearing) deleveraging/restructuring that is required. Because the fundamental issue is one of solvency - not liquidity - the ECB's continued artifice of plugging liquidity shortfalls does nothing but lessen the confidence in the system and reduce any faith in price levels as without addressing the real insolvency, trust will never return.


Europe's ECB-Driven Toxic Debt Loop...


1) Capital flight from the periphery to the core...

...due to uncertainty over the future: intervention preventing price discovery and challenges views of any sustained confidence...

Portfolio and Other Investment Capital Flows in the Euro Area, Excluding Central Banks.


...leads to

2) widening sovereign spreads as foreign holdings of periphery debt fall

...which continues but has also lost any signaling since the ECB's 'promise' of intervention - which causes private borrowing to fall (since risk-based pricing is obscured), but does encourage speculative hot-money flows to front-run the actions (further removing any risk-appropriate comprehension of value)...

Spain and Italy: Changes in Foreign Investor Shares and Yields

[e.g. GGBs at 10% of Par MAY be a good value, but at 20% of Par (supported by the incessant hope of another extension) they provide nothing that fundamentally signals real-money to re-enter anything but their most short-term market]


which means...

3) Private borrowing is being replaced by public sector flows...

... as the ECB (and its peers EFSF/EFSM and SMP of the future) will replace the missing private borrowers with public sectors flows...

Euro Area Exposures to Greece, Italy, Ireland, Portugal, and Spain


which leads to...

even more obscuring of any market-based signaling which will inevitably make capital seeking safety nervous and therefore we rotate back to stage 1 (capital flows from the periphery to the core) in a vicious circle.


This circular toxic debt loop of death merely leaves a real-money investor questioning everything as fundamentally we all know the problem at the sovereign and financial system (even more tied together due to LTRO's encumbrance - another unintended consequence) is one of solvency and not liquidity.


By 'enabling' banks and sovereigns to delay addressing the insolvency issue, creditors will simply reduce exposure to manage risk - forcing the ECB to intervene further.


Charts: IMF

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A Lunatic's picture

circular toxic debt loop of death



markmotive's picture

Here's a little game created by the Fed itself. Be Fed Chairman for 16 quarters.

Now as you play, keep rates <1%. Tell me what inflation rate you end up with.

I got 25+%

bigdumbnugly's picture

catchy yes.   i can't find an easy  way to work it into a refrain though.


and then this:     the ECB's continued artifice of plugging liquidity shortfalls does nothing but lessen the confidence in the system and reduce any faith in price levels as without addressing the real insolvency, trust will never return.

even this statesider has heard the story a hundred times over of the little dutchboy plugging the holes in the dike.    i guess the europeans figure its a fairy tale not worth noting.

Joe A's picture

Yes, the fairy tale is wrong: the little dutchboy stuck his fingers in dykes, not dikes ;-)

dolce vita's picture

"real money investor questioning everything"


also catchy and....kitchy

Monedas's picture

Second !   Blood flight from the periphery to the core .... Viagra !

Dr. Engali's picture

I wonder what the history books,if we survive this and there are any, will say about this period when written? I wonder if they'll be full of bullshit like the books on the first Great Depression, or will they actually learn something this time? My guess is the former.

in4mayshun's picture

First of all, there will be no books; only history wikis stored in the cloud that, of course, can and will be edited at-will by Google/CIA. And the information will point out that mankind nearly slipped into the abyss until a yet-to-be-determined dictator stepped in and saved America from itself by declaring capitalism immoral and furthermore illegal. Socialism will be the new panacea where everyone will have a rent-controlled 300 ft apartment and be issued a set of i-devices at birth.

Dr. Engali's picture

This country's going straight down the shitter.

lolmao500's picture

Shakespeare was right : KILL ALL THE LAWYERS... then the statists.

falak pema's picture

Shakespeare wrote plays and only killed through poetry.

Those who run the world kill in cold blood and say that they uphold the LAW.

Get the difference?


bigdumbnugly's picture

straight down.   the counter-clockwise swirl has been canceled.

Zadok's picture

Reverse the swirl, change hemispheres!

Radical Marijuana's picture

YES!  IF this court decision was up-held upon appeal, it would become the single greatest actually allowed, so far, step towards destroying the effect of the second amendment. Gun companies would be put out of business! They could not afford the insurance needed to defend themselves against malpractice suits regarding the use of their guns. Any crime committed with any gun, from anyone in the chain of production or distribution, could result in anybody in that chain being held liable. So far, the Supreme Court of the USA has tended to uphold the core of the second amendment. However, if this precedent got established it would change the gradual death of the second amendment from a thousand cuts, to the instant result of thousands upon thousands of cuts, in the foreseeable future, killing the gun industry off in America.

RockyRacoon's picture

And to the list I'll add that the NRA will shit the bed.  Don't think they won't be throwing some member dues at this problem.

SmallerGovNow2's picture

But the federal government can provide guns (read fast and furious) to thugs and mexican drug dealers and it's no problem...  What a fucked up banana republic we've become...

BigDuke6's picture

Listen TD

i dont mean to whinge but can we have less on europe and more on silver and gold at this important inflection point in time?

Europe bores me. The swiss bore me.  The swedes? dont get me started..

fourchan's picture

just eliminate mark to market like our tbtf's have.

then no insovency is too big because its all worthless  or worse.


the moneys all ponzie holding this tower of shit sandwiches up anyway.


buy gold

lolmao500's picture

Eliminate mark to market? It already doesn't exist.

Monedas's picture

Death spiral circle jerk suicide pact by naked European Socialist banker sky divers going for a Guiness record ?     buy gold

q99x2's picture

Shouldn't fraud first be made illegal before people with money invest? Maybe money and the way it works in the real world diminishes the relavency of law and fraud. Or things are so fubar that seeing the sun rise tomorrow takes precedence over making a clearing in the forest. Where is William F. Buckley's favorite chair? 

falak pema's picture

ZH still reasons in terms of a market economy. That model is dying under the weight of its own monopolistic manipulation.

We are moving to a command economy more and more, and central planning will be required to manipulate, control and deflect investment to what is politically acceptable in a zombified economy; until the debt crap built up by the financialista cabal, the scions of so called "free markets", has been cleaned out; if it can be, otherwise it'll be WAR.

That is the lesson of past history. 

This divergence between the Oligarchy power block that holds all the fiat profits, and statist bureaucrats; aka EU bosses; is now out in the open in first world; as we see DC now openly bowing to it in the Obama administration. They have a situation beyond control, so their compass is totally clueless.

The nexus of this dichotomy is in DC where both conflicting power factions : centralised state controllers and WS oligarchs, who want to have their cake AND eat it, face up. 

Guess What? On past performance this will not end well! We are in unchartered waters, with powerful people in total denial.

There is no way out of this except "controlled" monetary deflation; is the theory of the " euro/FED statists".

Print, print to save the current situation and impose restrictions on the private market mechanisms, cause of this current crisis. Is their solution.

Whereas the Oligarchs want more government sector reductions to pauperise the 99% even more and save their stash thru allowing the banks to "profitise" their way out of the mess. 

ZH sees the fallacy of both arguments and points to the fact that only a gold standard can save what is to be saved, and then let the market purge out the bad debt. Come what may! 

That is something NEITHER camp is willing to accept. And they call the global shots! 

We are between Charybdis and Scylla and the people's boat is going to get crushed on both sides of the pond.

Whence the drones, and the calls for false flags and wars; but with whom? 

Ps : the so called "real investors" are the least of the worries of the Ponzi defending top Oligarchy. Their game is debt slavery and pure speculation.

proLiberty's picture

Toxic, loopy, upside down, inside out, fiat money, debt as an asset, Keynesian economics is at the heart of Europe's misery loop.


Just Ice's picture

EF Hutton reborn

falak pema's picture

TAlking about central planning and despotic engineering to preordained standards : 

Here is an interesting take on what made Apple design of UI so great and seamless for some; us the users; and a pain in the neck for those inside the design factory!

Steve Jobs was a despot when it came to implementing his inner vision of products; my way or the highway!

And we love that "centrally planned" consistency; now we have the "other" story and it might change the Apple design philosophy in the post Jobs era :  

Many Apple Designers Are Sick Of Doing Things Steve Jobs's Way, And A Civil War Is Breaking Out - Business Insider

WhiteNight123129's picture

Meanwhile Ireland has returned to the bond market, create a good dose of stagflation and everything is solved.