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"Just When Consensus Thinks Europe Is Exiting The Crisis" Or Why You Can't Handle The Truth About Europe

Tyler Durden's picture




 

... but for those who can, and wish to see beyond the propaganda of the Eurozone's unelected leaders, here is Natixis with a candid, honest summary of Europe's sad, "unsustainable" predicament.

Just when the consensus thinks Europe it is exiting the crisis...

by Patrick Artus of Natixis

This growing differential between real interest rates and growth rates is significantly harming borrowers' solvency. Consider the case of public finances. Due to the widening differential between the real long-term interest rate and the real growth rate, the primary fiscal surplus which stabilises the public debt ratio (Chart 5) is currently (percentage points of GDP):

  • 4.5 in Spain, versus an actual deficit of 4.0
  • 7.0 in Italy, versus an actual surplus of 2.0;
  • 11.7 in Portugal, versus a deficit of 1.0;
  • 4.8 in Ireland, versus a deficit of 2.0;
  • 26 in Greece, versus an actual deficit of 1.5.

These countries are therefore clearly entering deflation, a situation in which disinflation leads to excessively high real interest rates.

The rest of the euro zone is not in this situation. The real long-term interest rate in the euro zone, excluding the troubled countries, is 1%, just above the growth rate (Charts 7A and B); the euro zone excluding the troubled countries has no primary fiscal deficit (Chart 7C) and is therefore close to solvency.

The troubled euro-zone countries are faced with not only a rise in their real interest rates but also with the need to return to restrictive fiscal policies in 2014. In 2013 fiscal deficits were not reduced, except in Greece (Chart below, left), because these countries took advantage of the postponement of the date by which they have to bring their deficits under control. This situation is leading to a very rapid increase in public debt ratios (Chart below, right) and is therefore unsustainable; moreover, it is unacceptable for the European Commission, the ECB and Germany.

The ECB is therefore faced with a new heterogeneity in the euro zone. The troubled countries are being pushed into deflation due to the very large differential between real interest rates and growth rates which results from the rapid decline of inflation; this is not the case for the other countries. If the ECB does not react, the troubled countries will therefore find themselves in an even worse situation of confirmed deflation. What can it do? The solution that would be most effective, but is probably unacceptable for the ECB, would be to act like the Bank of Japan: massive purchases of government bonds of the troubled countries (Chart 10A) leading to a rise in inflation expectations and actual inflation (Charts 10B and C) and a fall in real long-term interest rates (Chart 10C). The probability of the ECB conducting this policy is very low; part of the euro zone is therefore likely to become mired in deflation just when the consensus thinks that it is exiting the crisis.

Source: Natixis

 

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Mon, 11/04/2013 - 19:07 | 4120585 Al Huxley
Al Huxley's picture

I'm starting to wonder whether it's worth my while to know the real situation - maybe I should just go along with the propaganda - the markets seem to be benefiting quite a bit from doing so, and maybe I'd be happier travelling with the herd instead of always moving against them.

Mon, 11/04/2013 - 19:10 | 4120594 Oldwood
Oldwood's picture

Reality will remain irrelevant, until its not.

Mon, 11/04/2013 - 19:15 | 4120601 knukles
knukles's picture

Ah, who even cares anymore.
We all know Europe is just Europe, and gotten worse as the EU has grown
So why even bother about the getting better crap
They been saying it for years and nothin's gotten better because there have been no fiscal structural changes so it's just not gonna happen.

Phhht!  As the Frenchies are want to say.

Mon, 11/04/2013 - 21:07 | 4120882 Cdad
Cdad's picture

Regarding Europe "not being sustainable"...I would reply nah ah...poverty and financial oppression are very sustainable.  But what you said works, too.

Mon, 11/04/2013 - 20:18 | 4120744 Peter Pan
Peter Pan's picture

The herd has a power of its own, but I would advise to be at the back of it when the cliff is reached.

Mon, 11/04/2013 - 21:48 | 4121043 Seeking Aphids
Seeking Aphids's picture

Yes....my science teacher once said to me: 'You always have to do things differently, don't you?'....I still do, can't help it.....don't believe in the current market boom, don't believe in the current valuation of commodities and mines, own gold mine stocks.......in short, am totally fucked......until I am not............

Mon, 11/04/2013 - 22:51 | 4121259 Notarocketscientist
Notarocketscientist's picture

Participating in this insanity will generate paper gains for you - but you will never time the exit right - and your paper gains will be worthless - and even if you are lucky enough to get out in time what do you do with your paper gains?

Here's a solution - just buy gold and go to sleep (you many not be able to buy gold at any price if you wait)

 

Mon, 11/04/2013 - 19:14 | 4120602 Oldwood
Oldwood's picture

What would be interesting to know is how many billions if not trillions has been extracted from the world economy by the very people instrumental in creating this disaster. The only thing productive that any of these people are doing is getting paid to paper over their own shit. I'm just sick of it. I suppose if my business was doing better I might be a little more forgiving, but I say fuck'em all.

Mon, 11/04/2013 - 19:15 | 4120605 delacroix
delacroix's picture

once you're in the slaughterhouse chute, there's no exit.

Mon, 11/04/2013 - 19:18 | 4120608 knukles
knukles's picture

Oh, what a nice thought to lie down and cuddle my dork with tonight.

Kinda like waking up with Lady Gaga stitched permanently on to your creberal cortex.

Mon, 11/04/2013 - 19:25 | 4120626 ShrNfr
ShrNfr's picture

With or without her "meat dress" that she had tailored at the slaughterhouse?

Mon, 11/04/2013 - 19:54 | 4120684 Nick Jihad
Nick Jihad's picture

Mmmm, something for both me _and_ my dogs to get excited about! :-)

Mon, 11/04/2013 - 19:58 | 4120693 El Vaquero
El Vaquero's picture

I think I saw a movie about that once.

Mon, 11/04/2013 - 19:42 | 4120653 Oldwood
Oldwood's picture

Yes and we are all lining up nicely, only complaining about the smell. Are you sure there are more free shit at the end of this line? Just askin, cause I heard a rumor somewhere that they was lying to us! That can't be true!

Mon, 11/04/2013 - 19:25 | 4120622 ShrNfr
ShrNfr's picture

Just as well that I am a fan of this shit, cuz the shit is certainly going to hit the fan.

Mon, 11/04/2013 - 19:26 | 4120623 wisehiney
wisehiney's picture

Slowest fucking bad moon in the history of the universe.

Mon, 11/04/2013 - 19:29 | 4120635 Pareto
Pareto's picture

This statement: "The solution that would be most effective, but is probably unacceptable for the ECB, would be to act like the Bank of Japan: massive purchases of government bonds of the troubled countries", is bunk.  If its ok for Japan, US et al to print, why not the EU?

 

I think its more likely that they will print and like everybody else, buyout all the toxic paper with cheaper Euros, then, like everywhere else, everybody can stay in their houses for free.

 

Its a beautiful thing.

Mon, 11/04/2013 - 19:42 | 4120655 Oldwood
Oldwood's picture

Whatever it takes, right?

Mon, 11/04/2013 - 19:58 | 4120691 Nick Jihad
Nick Jihad's picture

When the FED announces a QE program to buy Illinois debt, then we can talk about a direct ECB bailout of Greece.

Mon, 11/04/2013 - 20:40 | 4120793 Its Only Rock N Roll
Its Only Rock N Roll's picture

Why would they have to announce such a thing?  What makes you think they already haven't started buying that toxic crap on the open market??  Who IS buying that paper?  How about the marginal buyer for Puerto Rico paper? 

The Fed is ALL IN at this point.

Anything goes to keep the system from imploding.   

Mon, 11/04/2013 - 19:36 | 4120642 logicalman
logicalman's picture

All the graphs/charts in the world are less relevant than the fact that the problems are FIAT, fractional reserve, derivitives, criminal banksters and corrupt politicians.

The occupation of accounting should be re-named numerical fiction.

Sort out that lot and we'll all be a lot happier (well, not the pols or banksters, so almost all)

 

 

Mon, 11/04/2013 - 19:47 | 4120662 Oldwood
Oldwood's picture

And the alchemists said it was impossible to turn lead into gold! TaDa! Riches beyond your belief with the simple stroke of the keyboard. I wish mine worked like that as it only seems to turn gold into lead. Its a high caliber investment!

Mon, 11/04/2013 - 19:56 | 4120688 El Vaquero
El Vaquero's picture

Not only that, but that fifth chart is obviously comparing apples to oranges.  Notice that it says "Primary Fiscal Deficit."  The primary deficit is at or below zero for the past two years, yet the public debt still goes up.  In other words, there is more deficit than just the primary deficit and we're not getting the whole picture there. 

Mon, 11/04/2013 - 20:19 | 4120724 RiverRoad
RiverRoad's picture

Our Qe $$$ is what keeps Europe's heads above water.  So don't worry about it ending anytime soon.  Screw the Fed's headfakes.

Mon, 11/04/2013 - 20:43 | 4120802 logicalman
logicalman's picture

It's not about USA/Europe.

It's about criminals and decent, hard-working folks.

Unfortunately, the criminals are running the show.

Countries are just another 'Divide and Conquer' technique.

Your concept  of 'country' is being used against you.

 

Mon, 11/04/2013 - 20:13 | 4120723 Constitutional ...
Constitutional Republic's picture

Very good charts. Cheers.

Mon, 11/04/2013 - 20:16 | 4120733 RiverRoad
RiverRoad's picture

The western world is going down the same deflation toilet the Japs went down.  The Fed knows it, and all the QE in the world can't do a damn thing to stop it.

Mon, 11/04/2013 - 20:22 | 4120751 Doom and Dust
Doom and Dust's picture

The troubled countries are being pushed into deflation due to the very large differential between real interest rates and growth rates which results from the rapid decline of inflation;

 

Confuses real interest rates and nominal growth rates.

But anyway what's so bad about a little deflation?Do you think normal people care about debt-to-income ratios, governments' or households'? No. Real people care about household budgets. And those are actually helped by deflation.

Commodity, food and housing prices are down. Sure, the debt-to-income rate will worsen - who cares? It's all about debt servicing for most people. Wages and benefits are stagnant, so any decrease in the prices of daily goods increases debt servicing capacity.

Such disinformation. But I guess nobody drinks Kool Aid knowingly.

 

Mon, 11/04/2013 - 20:38 | 4120780 fighter
fighter's picture

why do long term rates fall for currencies that are inflating?

normally this would be seen as a default on the same debt is a bonanza of inflation

that it doesn't suggests there is a special type of inflation for debt backed currencies that makes the currency more valuable. The reason Greenspan is giggling and not in hiding. There is no such fairy.  butt naked goth chicks 'bout to bus'  her terriroririal jizzings? Wisdom calls in another direction so there is indeed a third way

 

Mon, 11/04/2013 - 21:55 | 4121076 MaxThrust
MaxThrust's picture

If you were a politician in one of Europe's troubled countries, why would you bother fixing anything. No one is going to thank you. Better to play the game until the music stops and the lack of chairs forces action.

Tue, 11/05/2013 - 03:22 | 4121940 dunce
dunce's picture

A contributor at seeking alpha described spains .1% uptick as a "robust" recovery. I usually go elsewhere for humor.

Tue, 11/05/2013 - 04:30 | 4122000 Iam Yue2
Iam Yue2's picture

One of the least re-tweeted articles for some time; suggesting that nobody gives a toss about Europe.

Tue, 11/05/2013 - 06:16 | 4122047 falak pema
falak pema's picture

Patrick Artus belongs to one of the most troubled banks; so his bank has a lot of thin skin out there; whence his despondency fed on reality. He knows his employer is front line in the banking dominoes.

The current fight in EU is between the Merkel model and ECB model to curtail this widening divide, both in government debt as in private banking debt (which is larger in EZ), based on two incompatible economic models in Euro zone; north and south; with France, key pillar of core EU finance, now bestraddled economically.

We know Draghi and ECB would like to follow Abenomics and wants Germany to foot the bill of last resort; which Merkel refuses. ECB only has the fire power that its core countries delegate to it in a heterogeneous fiscal environment.

Is the bad banks hospital ready to allow the private sector to heal while the government sector chugs along in zero growth EZ all based on easy money, w/O hitting the high interest barrier, thru ECB print and sterilise sleight of hand? 

Do the math and the German juggernaut allow such a scenario? 

We'll soon find out! 2014-2015 is moment of truth for the math and the political-oligarchy class. Beyond lies never never land of bail ins galore! 

The first world will not only have to consider a huge wealth tax (Cyprus the first world one off) but also a new banking and economic model (what a bitch that haggle and gaggle will be).

Tue, 11/05/2013 - 07:37 | 4122096 homonohumanus
homonohumanus's picture

Here is a big news for investors, in France and plenty of others countries in EU you don't have such a thing as the BLS which provides raw number for unemployement and allow people here and there to do more proper calculations than what the governement does.

It is an example but applies to mostly every others statics, in France the institute named INSEE doesn't not provide any raw number and informations about the number /stats they provide.

In Europe we have the champions of sugar coating numbers worse than that actually as raw numbers are more than often unavailable...

So the recovery in Europe? That is the worse joke I've heard. I speak for France (but it seems to be the same or worse in quite some others countries) the situation is more akin to a free fall than anything else...

Now Northern countries I don't know, though UK mostly prints and the City protects it-self somehow and Germany is nowhere near the power house lots of people think it is, there is plenty of hidden debt, contrary to the belief their retirement is not funded either, Lands are in a terrible fiscal shapes and so on. Merkel is joke, she tries to please the hears of Germans but foremost investors, if the situation that great how it comes it has been mostly a month since the election and there is no governement? How it comes it is a non subject in EU?

THe situation here is worse than in US, it is disfunctional ensemble. People here at large used to have saving, contrary to the US, they are being savagely plundered.

 

Beware offical data there are completely useless...

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