European Banks Need To Sell Up $4.5 Trillion In Assets In Next 14 Months, IMF Warns

Tyler Durden's picture

While yesterday it was the sovereigns who suffered the wrath of the IMF's wholesale growth outlook downgrade (unbeknownst to Christine Lagarde), today it is the turn of the financial sector (which is increasingly being blurred with the former in a world in which central banks are used to both backstop bank liabilities and fund endless public deficits, unafraid of the consequences in a closed loop fiat world in which defection is, so far, impossible) to be greeted by a cold dose of reality emanating from the IMF's "Global Financial Stability Report" especially as pertains to Europe's insolvent banking system. The most notable finding of said report is the admission that the IMF was only kidding when it said six months ago, in April of this year, that the worst case outlook now has European banks deleveraging to the tune of $3.8 trillion through the end of 2013, or over the next 14 months: now this number is 18% higher, or a gargantuan $4.5 trillion (12% of bank assets). This is how much debt Eurobanks will need to shed in a "weak policies" case in which Europe continues to delay implementing fiscal reform, aka austerity, as per Figure 2.14. Even the baseline (and this being the IMF it means it has zero chance of happening) scenario is not much better, at a revised $2.8 (7.3%) trillion in deleveraging. The reason for the increase is due to "lower expected earnings, higher losses linked to worsened economic conditions, and greater funding pressures on banks."

Ironically as Figure 2.15 indicates, one of the primary drivers for deleveraging is none other than the central banks, whose "financial repression" regime is crushing not only savers, but banks as well, who are now forced to dump hundreds of billions in debt for which they get no economic benefit. The only real question left is: just who will buy all this debt. And the only real answer is, of course, the ECB, which is why all those devising 2013 EURUSD forecasts, model an ECB balance sheet that will be about 100% larger than it is currently (a move which the Fed will not idly stand by and watch without taking corresponding action).

Breakdown of IMF deleveraging forecasts for the three scenarios, of which the realistic one is highlighted:

How does the IMF define the three set of underlying policies:

  • Under baseline policies, foreign investors’ share of the total debt stock is assumed to continue to decline at the same pace as seen during 2009–11. For periphery countries, the share of foreign debt holdings is assumed to move halfway toward pre-euro era levels. The assumptions on sovereign spreads reflect positive market developments following the announcements by the European Central Bank on July 26 and September 6 launching the Outright Monetary Transactions program. Periphery sovereign spreads are assumed to stabilize and/or gradually decline by end-2013
  • Under complete policies, by contrast, confidence returns and foreign investors increase their share of the total debt stock as funds flow back to the periphery. Periphery spreads tighten by one to two standard deviations below the baseline.
  • Under weak policies, the withdrawal of foreign investors accelerates to twice the pace seen since 2009. Periphery spreads widen by about one standard deviation above the baseline.

One can easily see why with the situation in Europe deteriorating ever faster courtesy precisely to the ECB, which has now taken over all credit formation, leaving no reason for foreigners to suffer the same pain and suffering as Greek bondholders did initially, and as Spanish, and all other PIIGS private holders will go through soon.

Some further color from the IMF:

  • The deterioration in financial and economic conditions entails greater pressure on bank asset quality and capital. The scarcity and higher costs of bank funding, sovereign stress, and a weaker economy are adding to the pressure on bank profits, while weakening economic conditions have led to a deterioration in the quality of bank loans, as indicated by a rise in nonperforming loan (NPL) ratios. Among the four factors analyzed here—capital, funding, financial repression, and financial fragmentation— capital emerges as one of the key factors, particularly for weaker periphery banks (Figure 2.15). This means, for example, that even if funding gaps are closed, bank deleveraging pressures will remain.
  • The periphery bears the brunt of shrinking credit supply. The cutbacks in the supply of credit to the periphery countries are much larger than in the core euro area (Figure 2.16). The supply of total credit in the periphery (including cross-border lending) is expected to decline 9 percent under the baseline  policies scenario and almost 18 percent under the weak policies scenario.
  • EU banks cut back the supply of credit outside the euro area as well, notably in emerging Europe, Latin America, and the United States. In some cases, however, domestic banks and foreign banks operating in these three regions are expected to step in and offset the impact that the EU banks’ pullback will have on credit supply (Figure 2.17). For example, recent European asset sales in the United States and Latin America have so far been orderly.
  • A rapid move to the complete policies scenario would avoid additional economic damage to periphery economies due to the credit supply shock (Figures 2.18 and 2.19). The estimated impact on euro area credit supply under the baseline policies scenario is broadly in line with the WEO baseline. Under the weak policies scenario, the credit supply shock from the EU bank deleveraging would lower periphery euro area GDP by more than 4 percentage points relative to the WEO baseline in 2013. In the core euro area, GDP would contract much less, in line with the relatively moderate impact on credit, but still significantly—by 1.5 percentage points relative to the WEO baseline. In the complete policies scenario, GDP at end-2013 relative to the baseline policies scenario would be two-thirds of a percentage point higher in the core, and almost 2 percentage points higher in the periphery.

And while Greece is a goner, the jury is still (supposedly) out on Spain and Italy. What will not help them is that due to the unbreakable linkage between banks and sovereigns, absent massive deleveraging, the GDP of these two countries will continue to collapse.

It gets worse. As we have long discussed, one of the key topics that everyone loves to ignore when talking Europe is the trillions in contingent liabilities, which just because they are not directly held on the books, does not mean they do not exist. In Europe's case not only do they exist, but are rising, as the IMF warns.

The slow pace of crisis resolution has pushed up the size of contingent liabilities for economies in the core of the euro area. Contingent liabilities reflect the  size of potential ultimate fiscal transfers, or the costs of potential defaults in the periphery under a breakup scenario, should the crisis deepen. Under the assumption that the ECB provides unlimited support to fill in the funding gap left by capital flight from the periphery, one measure of the size of contingent liabilities is given by the estimated size of payment system (Target 2) balances, the commitments on bilateral loans, and support for domestic banks with exposure to the periphery. Under the assumption of unlimited support from the Eurosystem, Target 2 liabilities could be expected to continue to rise for the periphery (Figures 2.25 and 2.26). In the baseline policies scenario, capital flows from the periphery to the core would continue, marked by further financial fragmentation and consolidation of bank balance sheets within national borders. The weak policies scenario would result in stronger outflows from the periphery and net outflows from the euro area as investors seek to evade the impact of a potential breakup of the euro area. Roll-offs by foreign investors would climb, the pace of overall outflows would rise further still, and the euro would likely come under substantial depreciation pressure. Under the complete policies scenario, confidence returns and foreign investors increase their share of outstanding debt.

The biggest loser here, as in every other category: Germany, which will end up seeing €2 trillion in TARGET2 claims which in turn will never be satisfied as the system merely accelerates its collapse into a debt supernova.

The big picture, of course, is that even the IMF now concedes Europe is in a closed loop Catch 22: unless European countries manage to restore "foreign" confidence which in turn would mean putting their fiscal houses in order, something which has proven absolutely impossible in Europe absent such one-time gimmicks as LTROs and otherwise hollow confidence boosters as ECB warnings to not fight the ECB (which work until they are tested, but first need to be activated, ahem Mariano Rajoy), the banks will be forced to delever even more, which would mean the ECB would have to "onboard" even more of their debt as nobody else will, which means even more foreign creditor flight, which means greater deposit outflows, which means more ECB intervention, until finally, the ECB is the only player in town, a process which can be visualized (in progress) in the following capital flow image, especially Figure 1.7:

At the point when the ECB is the sole owner of all European financial debt (and sovereign debt via repo), the endgame for the fiat system will finally be here, as the only thing more dangerous than the ECB will be all other central banks which will have no choice but to follow suit and monetize everything in the global race to debase currencies, and monetize ever more budget deficits in a world in which the rich increasingly preserve their wealth, and refuse to pay taxes (converting financial assets into hard ones), having finally grasped the endgame.

As for the immediate task at hand: how European banks will deleverage to the tune of $4.5 trillion over the next 14 months, Europe has our blessings.

Source: IMF Global Financial Stability Report

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
tsx500's picture


ACP's picture

Cable really needs a "Eurocalypse" channel, just so's I can enjoy this all on the couch with a beer in my hand.

knukles's picture

Gotta tell ya' I'm beginning to agree with the Pez-iDident that it's Big Bird be the problem

NewThor's picture

Crap sells but who is buying?


Alpo for Granny's picture

Crap sells but who is buying?

The Fed, that's who.

Dalago's picture

THIS is what the IMF specializes in.  Watch here:


Like a mafia they have economic hit men destroying countries and human life.

Augustus's picture

The IMF was not responsible for Greece and other Euroland countries creating their deficit financed syatems.  Please provide a link to any IMF advice to countries which recommends creating unpayable off balance sheet liabilities.

economics9698's picture

Did I read this shit right?  Who has some LSD?

mick68's picture


 Best part is knowing that Greece/Spain bondholders are taking a massive haircut. Yep, there's a reason that bond pays 7% bonehead.


China blows trillions on US bonds trying to prop up the dollar, then has their debt devalued by a printing press, and now blows billions on junk bonds in the EU trying to prop up their best customer, only to get shaved.


Why exactly are we impressed with China's economic policies again?

jeff montanye's picture

they have the largest stockpile of foreign reserves in history.  well, at least as big as japan's in 1989 and the u.s.'s in 1929.  so, really big.

on a related note, from where the rulers will actually rule (arrrr, matey?):

(thanks jesse)

does academi have a navy?

Offthebeach's picture

The wealthy are outliers and say nothing about the the world.

King_Julian's picture

Mark to market bitchez!

Ness.'s picture



hush little baby don't say a word...

NewThor's picture

hush little baby don't say a word

uncle sam is going to buy you a diamond bird

and if that diamond bird don't fly

then print a quadrillion 

and watch the world die.

ACP's picture

I thought it was Peace Sells, Who's Buying?

NewThor's picture

Yes. i was referencing the Megadeath album.


ACP's picture

And now for Metallica:


NewThor's picture



disabledvet's picture

actually it is. We're talking "not all fiat is created equal." clearly only Germany can afford the euro (good luck competing against the dollar...gotta go through the British Pound first Herr Merkel!)...all others will be forced to go back to their "regular programming." that would be the italian lira, the Spanish Peseta and the French Franc. That instantly solves the problems vis a vis competitiveness (your money is now worth a HELL of a lot less unless you are Germany), creates one HELL of an inflation (never a problem for the Southern Lands so i hear)...and Germany gets to keep everything they bought with one of the world's most worthless pieces of paper ever! all without firing a shot! now..."what to do with Greece...what to do with Greece...

jekyll island's picture

Why sell assets? Just print more money. Duh.

EuroInhabitant's picture

How many times did we hear about huge auctions, piles of money to be raised by governments, banks and companies with of course the certainty they would fail to do so? In fact, all auctions of Spain, Portugal, Italy and Ireland succeeded. Has Greece done anything lately? (Anyway, they get money.) Spain has meanwhile raised the main part needed for 2012, despite much hype it wouldn't. So that 4.5 trillion will be as easy, as there will be enough buyers, even if it's only the ECB.

hannah's picture

i have a zimbabwe 100 trillion dollar bill.....anyone got change...?

Dr. Engali's picture

How much does a Zimbabwe dollar sell for on eBay ? Are we getting close to parity?

imbrbing's picture

will a toilet paper role of $100's cover it?

MsCreant's picture

Absurd. Give. It. The. Fuck. Up. Already.

JPM Hater001's picture

When I was a kid this was the part where I picked up all the toy soldiers, threw them in the air and went


LongSoupLine's picture



$4.5 Trillion?!?  Holy shit, that's not a fire sale...that's a vaporize sale!


(cue Jamie Dimon...buyer.)

dbomb12's picture

"The most notable finding of said report is the admission that the IMF was only kidding when it said six months ago"

So are you still kidding Christine, You Dyke!!

We are still waiting for the punch line

IMA5U's picture

i guesss even gold would go down

Bay of Pigs's picture

LOL, for a second there I thought we were in trouble...

SHIT SHOW. Polish that Turd!


nmewn's picture

"The only real question left is: just who will buy all this debt."

Well, there is that.

The governments destroy their trust, credibility & treasuries, handing out debt & goodies to remain in office as bankers lustily buy...and then suddenly, the brilliant bankers discover they hold the debt of impoverished governments.

What could possibly go wrong with this business model?

John Law Lives's picture

How shocking would it be if Uncle Ben offered to help out by purchasing some of their assets...  I wouldn't put anything past Chairsatan these days.

knukles's picture

And what, dear Sir, do we think that great big humongoliod line entry with no detail disclosure termed "Other Assets" on the Fed's balance sheet just might be?
Even after he stated in CONgressional tits-to-me under oath (or the influence which ever came first) that the Fed could and would and just might (as in hint-hint) have done so?



jimmyjames's picture

"Other Assets" on the Fed's balance sheet just might be?


Remember Maiden Lane--shopping malls and motel chains etc.

Remember the Fed Swaparama on the night of the great credit freeze up (ZH covered it)

Have to wonder what is today's market value and worse-what will be the value when the unwind is eventually forced by the bond market-

John Law Lives's picture

"And what, dear Sir, do we think that great big humongoliod line entry with no detail disclosure termed "Other Assets" on the Fed's balance sheet just might be?"

I wonder if hookers and blow are also under that same line entry...???

nmewn's picture

Í wouldn't be shocked at all.

One of these days everyones going to wake up to the lie...they don't have the money to buy them. The assets are real but the claims to them would have been counterfeited/printed.

Kinda like dropping a slug in an old newspaper box on the street corner...same thing...its theft.

knukles's picture

They see it as dropping their own slug in their own paper box with no consequences.

NewThor's picture

....wait, they have a business model?

who knew?

disabledvet's picture

"the price for exiting the Club is far greater than entering it"...tis true. There will be an interest rate expense....and it will be substantial. Clearly you don't want to own any debt denominated in euros as that will all be monetized...having said that the debt monetized in the local currency could become quite valuable depending on how it the dissolution is structured...if there is a plan at all of course (and it will need to be structured...enter Ms. Lagarde. Viva France!) this is for debt restructuring experts...that will be "the best of the best" as they say and they only exist on Wall Street on the level needed for the EZ. Since New York created the EZ however...

dbomb12's picture

Ben said he is in for 2.5 trillion, as long as its a leveraged loan

SafelyGraze's picture

every time somebody says something about "buying debt", I get all, like, kony and everything

knukles's picture

As a law abiding, tax paying, naturally born citizen I start thinking about getting out the amyl nitrite

Rattling Bones's picture

Sounds serious, sounds like time to announce another meeting.

impermanence's picture

Imagine the IMF being the voice of reason!!

chump666's picture

They are panicking, as the IMF's white knight China is about to close up shop.

So just leaves mad Mario, the only sucker left buying Euro's and junk.  He prints like no tomorrow, Germany will leave the EU.