Albert Edwards: "The Eurozone Crisis Will Get Much, Much Worse" And "The ECB Will Print"

Tyler Durden's picture

Anyone expecting that the events over the last 24 hours will have changed the persistently negative outlook of one of the original skeptics, will be disappointed. The SocGen strategist falls back to that old time-tested principle in complicated situations: math and logic. His summary of events released this morning: "The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail – even if this week’s measures bring some short-term relief. I have minimal confidence that governments can turn this around within the confines of the eurozone project. You might be surprised though that I feel more bullish! Why? Both Dylan and I have come to the view that the ECB will be forced, by events, to monetise debt in the GIIPS and beyond. And if investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse." To be sure, we may see a brief respite as we get the traditional post-TARP knee jerk reaction, only for markets to digest the sad reality of the situation in the proceeding 48 hours. And what will that imply? To Edwards, it will be nothing short of the realization, that even with €1 trillion (or more), the ECB will have no choice but to commence outright monetization as well. And the real question will be whether or not "Germany, will leave the eurozone after being over-ruled on the ECB (again!) and in the face of such monetary debauchery?"

Looking at the macr Edwards, first points out the unsustainable fiscal picture at the "other" countries, assuming one applies the same logic to them as to Italy:

Italy never "enjoyed" a boom to suffer any bust. And on many measures, including reputable attempts to take account of off-balance sheet liabilities, Italian public sector debt fares well on cross-country comparisons (see chart below). These off-balance-sheet liabilities will now increasingly become visible to all. Who then will be really bust?

The complexity of Europe is only exacerbated by the feedback loop with a recessionary America:

Regular readers will know we like to use leading indicators. These have been weakening for some months in the US and elsewhere. We have not highlighted the Economic Cycle Research Institute's (ECRI) weekly leading indicator for some time, although it is as weak now as it was last year. But, unlike last year, this time around the ECRI have put out a rare recession call - link.


Lakshman Achuthan, the ECRI's COO notes that they made the recession call only after an array of economic indicators showed a “pronounced, pervasive and persistent” downturn consistent with a recession. “By contrast, in the summer of 2010, when some market bears interpreted the decline in one of the institute’s indexes as a signal that a recession was in the offing, the institute said the pattern pointed not to recession, but only to weakness.” (Does he mean me? Surely not!) The last time we entered a recession with unemployment this high was back in 1937 (see right-hand chart above). This is indeed a crisis.


Analyst optimism on profits has also slipped sharply recently (see left-hand chart above, optimism defined as EPS upgrades as % of all estimate changes). We find the change in optimism (dotted lines in both charts above) is a good leading indicator for the official leading indicators (see right-hand chart above). This signals continued weakness ahead.

But enough about the rest of the world. The ticking time bomb in Europe is and has always been Italy, and specifically its horrific governance structure.

With Italian 10 year bond yields once again pressing towards 6% in recent weeks, they are definitely still in the eye of the storm. The trigger for this  was back in early July, when Italian Prime Minster Berlusconi turned on his well-regarded Economy Minister. Reuters reported on 8 July that "Speculation is growing that Italy's Economy Minister Giulio Tremonti – credited with shielding the country from the eurozone debt crisis – will soon be forced out of government, which would further raise the heat on Italian bonds… Tremonti overcame cabinet resistance to push through a tough austerity programme last week, but now looks increasingly isolated and appears to no longer have the full support of Prime Minister Silvio Berlusconi.


"He thinks he's a genius and everyone else is stupid," Berlusconi said in an interview with Repubblica daily on Friday."He is the only minister who is not a team player," Until this untimely outburst, Italian bonds yields had consistently traded below Spanish yields by about 75bp (see chart below). Now they trade at a clear 50bp premium, with yields once again pushing up close to 6%. Belgium, without a government to speak of (an advantage?), but also suffering from a very high government debt/GDP ratio, has by contrast managed to keep below the market's crisis radar. Italy has been ill-served by its politicians for dragging the country to its knees unnecessarily. It could/should have escaped this debacle.

Albert concludes that "the real issue is Italy's incredibly low productivity growth (see top right-hand chart above). Hence, having been in excess of 2% yoy in the late 1990s, Italy's trend GDP growth rate is now barely positive on Vladimir's estimates (see left-hand chart below) and investment in people is poor (see right-hand chart below). The near-zero trend rate of growth means that Italy simply cannot grow its way out of its debt and will remain highly vulnerable to market shocks."

Furthermore, when looking at the present, one must not ignore the future, and the future hinges on a demographic crunch: "As populations age and
unfunded liabilities increasingly appear on the balance sheet, all governments are effectively bust. Reinhart and Rogoff in their book This Time is Different: A Panoramic View of Eight Centuries of Financial Crises - (link) show that there is no magic public sector debt threshold that determines when a crisis hits. It happens when the markets decides it is time to happen."

And going back full circle to the most recent events, Edwards redirects to a new and interesting question: not whether this bailout attempt will succeed: it won't; not whether the ECB will be forced to step up to the plate and monetize: it will, but whether or not Germany, after being once again overruled by Europe will say enough, and leave the eurozone.

Dylan and I feel more optimistic about the medium term. The current eurozone talks will not solve this crisis and it will get worse - much worse. But we would agree with the well known eurozone commentator, Paul de Grauwe of the Leuven University, who wrote “Everyone needs the ECB to step up to the plate. The ECB has no excuse not to act. In trying to keep its monetary virginity intact, the bank threatens to destroy the eurozone. 


The ECB will have to choose between its two most cherished ideals: the euro or its hard money principles. Notwithstanding some legal issues to get around and Germany being outvoted, we think the impending threat of a euro break-up will force the ECB to begin printing money, very reluctantly joining in the global QE party. Let's be clear - neither Dylan nor I view ECB monetisation as a "solution". Indeed its actions will mirror those of Rudolf Von
Havenstein, president of the Reichsbank in the early 1920s. He kept printing because he was scared of the mass unemployment that would ensue if he stopped - link. The question for me is not if the ECB will print, but rather will Germany leave the eurozone after being over-ruled on the ECB (again!) and in the face of such monetary debauchery?

In other words, as we have been saying for over two years, the fundamental question boils down to whether the opportunity cost of being part of the eurozone and funding the entire continent is greater than the loss of returning to the Deutsche Mark and abandoning the implicit peg which has kept the country's "currency" about 50% lower than its fair value since 1999. Last night's decision will bring the answer that much closer.

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MiningJunkie's picture

Just BTFD and remember that raising cash is raising shit. Eurozone and U.S. bankers are trashing the integrity of their respective currencies and they know it. SHORT cash; don't go LONG of cash by selling assets like stocks and commodities. The worst trade EVER in Zimbabwe was selling stuff to buy cash because you wanted to get "defensive".

Never underestimate the replacement power of equities within an inflationary spiral.

Ask an old German how 1921-23 was....

SheepDog-One's picture

In the Weimar Republic the people had the money, today the people are broke and the banks hoard the printed up fiat.

agent default's picture

And that's why stimulus programs will fail.  Banks will not be able to lend, not because they don't have liquidity, but because there is nobody credit worthy, or willing to get into debt.  This fine point is however seems lost to our Great Dear Leaders.

MillionDollarBonus_'s picture

"Italy's low tertiary education achievement stands out (Figure 3)”

This is what I've been saying all along. The public is clearly not educated enough to be setting prices. This is why top European economic advisers convinced European politicians to implement a short sale ban on financial stocks and sovereign credit default swaps. Top economists understand very well that the publics' perception of reality is irrational and uninformed, and this is why they are proactively seeking price controls to stabilize the markets. Goodness knows the mess we'd be in without price controls on interest rates and wages, which have delivered upward mobility and social stability despite prevailing free market forces. I genuinely believe that the current economic system is falling apart, and it is time for us to build a new world economic order in which only professionals are able to control capital allocation, for maximum prosperity, liberty and freedom.

machineh's picture

Good to see you here at ZH, Professor Kurgman!

sqz's picture

fundamental question boils down to whether the opportunity cost of being part of the eurozone and funding the entire continent is greater than the loss of returning to the Deutsche Mark and abandoning the implicit peg which has kept the country's "currency" about 50% lower than its fair value since 1999.

Germany is too addicted to their export market which at €1.15 trillion accounts for more than 30% of GDP per year. Re-introduction and revaluation of D-Mark by 40% minimum would dramatically increase their costs of exports and introduce their former captured members of the Eurozone as competitors. If the EZ remained intact it would devalue considerably, if it broke-up and sovereigns returned to domestic currencies, they would devalue even further than within the Euro. Regardless, Germany would be fully exposed to not only some already powerful export markets, but competitors with devalued/devaluing currencies, including US dollar. Weigh all this against reducing the future purchasing power of German taxpayers (or to be more specific the future purchasing power of the creditor nations within the EZ).

In my opinion, that makes it inevitable, particularly in the context of a slowdown in global growth, that Germany will *first* allow the ECB to keep expanding their balance sheet, printing and becoming a lender of last resort (very shortly) and then be possibly forced to leave the Eurozone much later, at least two to three years from now.

This is likely why gold has resumed an upward trend. The printing presses are here to stay, even by the ECB, and even if they are no solution to anything.

It's a printing war out there. The US is smacking everyone else around with $14+ trillion in bailouts since 2008, but the ECB will soon join the big guns with €2+ trillion.

Sophist Economicus's picture

Either you're joking (very funny) or you're a joke (sad)

Going Loco's picture

He is an agent provocateur. All her posts are like this. It's either sarc or sick, no way of knowing which at this stage.

Shocker's picture

I have a good feeling that this bailout package is going to work ......:)

MantiXX's picture

OT- I know I'm new here but can you actually respond as a person?  I think you're a CIA BOT.  One of those new AI BOT's thay've got for trolling the net and posting positive govt crap. Seriously, if you're not, post something a human would say, not this perfectly contrived crapola thats always so pro big govt.


BigJim's picture

Excellent trolling. Thanks for the laugh!

pupton's picture

Yes, the market is too stupid to function and must be led by the hand by central's funny when you actually see somebody who believes that horse manure...

BadKiTTy's picture

Hahahaha....... Quality"
Please keep it up. You really do give me the best laugh of the day. :)


He_Who Carried The Sun's picture

OkOk, but in the meantime I am going to get long in order to make some doe, if that is alright with you...

SheepDog-One's picture

Go for it, no one stopping you. Im out here though to hell with this. Have fun!

He_Who Carried The Sun's picture

"The U.S. economy grew modestly over the summer after nearly stalling in the first six months of the year, lifted by stronger consumer spending and greater business investment.

The Commerce Department said Thursday that the economy expanded at an annual rate of 2.5 percent in the July-September quarter. That's nearly double the 1.3 percent growth in the April-June quarter, and a vast improvement over the anemic 0.9 percent growth for the entire first half of the year."

If it wasn't for the unemployment we'd be back on our way to happy days, but the US won't hire until multinationals get a deal to repatriate their EX-US stockpile of cash and as they're making money anyway, incentive and pressure to do so is very low...

As the US 4th quarter is usually the strongest, risk is ON now... I'll wade back in....

Have fun!

PY-129-20's picture

lol - this is beyond comical. I just read some of the online newspapers here. And almost all of them are bowing down in front of Angie. Like Angie saved the entire world or so. Then you scroll down to the comments and see people running amok, really pissed off about this entire deal. Not one positive opinion. Surreal. Like this whole charade. Affenzirkus.

agent default's picture

You know, it shocks me.  These EU/FED assclowns are totally oblivious to what is glaringly obvious to the average man on the street.  To tell you the truth, I don't really care how the crisis will play out anymore, i think that it is fairly obvious by now.  but when I begin to realize the total disconnect between the people making the decisions and reality/arithmetic, and the arrogance with which they make and enforce their decisions, I get very scared indeed.

PD Quig's picture

"The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail..."

Keyword? "Ultimately."

These fuckers are willing to destroy anyone and anything in their quest to avoid paying the price of their fuck-ups. Unfortunately, we're all going to go down the tubes together. "Ultimately."

In the meantime, there is NO asset class that won't be pissed on. Time for some domestic drone strikes.

falak pema's picture

its arrogance and desperation. The whole western power structure depends on this, as war, the OTHER option, is verboten since the Cuban crisis days.

4horse's picture

The whole western power structure depends on this, as war, the OTHER option, is verboten since. . .  when

He_Who Carried The Sun's picture

You do not bet against the FED

AND you do not bet against ANGIE...

She has shown her quality as Europe can not be allowed to sink!

Where would the world go in that case? Back to petty fiefdoms?

Simple! ;-)

LawsofPhysics's picture

Sure, and how did that work out for all those people going long from 1920-1929 again?  Got physical?  You better.

He_Who Carried The Sun's picture

I do not expect to be long for the next 9 years my friend, only until X-mas, perhaps April... ;-) Here are forces at work far stronger than you and I and they're pointing UP right now and I must put something on the table... ;-)

LawsofPhysics's picture

I have something on the table and I think it may last through June even.  You are right,  the question remains, for how long do we run?  Where in that 1924-1929 market melt-up are we?

He_Who Carried The Sun's picture

That depends entirely on China and I think they will do all they can to mask any real trouble coming their way for some more time... Despite of all bullfrog twitter, they have a lot of firepower to camouflage things a bit longer...

LawsofPhysics's picture

Right, never discount an entire society with that kind of power (growing every day) that will do exactly as they are told.

He_Who Carried The Sun's picture

Its a sad truth, but a truth nonetheless.

gojam's picture

This Monday 31 Oct, it will be exactly 594 years since Martin Luther nailed his 95 Theses to the Wittenberg Church door.

The printing press ensured that the Roman hegemony was brought to an end.

Time for a new 95 Theses and for the Internet to take down this dishonest system.

I am more equal than others's picture

Luther nailed it to a church in Germany - now Germany has nailed it to a door in Brussels.


Kann es gibt eine größere Lüge als dies

LongSoupLine's picture

Die Wormser Dom im Baden-Württemberg .

Lived a mile away from it.

gojam's picture

It's the entire system of modern Indulgences and Simony that needs to be reformed, Germany is just part of that system.

4horse's picture

. . . and luther, as he would later learn, Eureka! and otherwise write, splattering alot more than 95feces alot further than some great schismatic churchdoor, turned out to be underwritten by just whom . . .




SilverIsKing's picture

Albert Edwards: "The Eurozone Crisis Will Get Much, Much Worse" And "The ECB Will Print"

SilverIsKing: "The Eurozone Crisis Will Get Much, Much Worse" And "The ECB Will Print"

(Your Name): "The Eurozone Crisis Will Get Much, Much Worse" And "The ECB Will Print"

Not hard to figure this one out.

bernorange's picture

Let us consult the Book of Armaments,  chapter two, verses nine through twenty-one ...


reload's picture

Sounds about right: In the end they will print, looks like todays action is already discounting it as imminent.

No Mas's picture

Here's a hint.  Whatever information ZH posts to indicate the ruination of all things fiat will be proven wrong.  "Bank" on it!

reload's picture

What do you mean by `ruination`?

Fiat nalue will continue to be destroyed - no question

will it be the medium of exchange for the foreseeable - yes.

Will you be ruined by holding fiat and nothing but fiat - yes, the trend of fiat depreciation will accelerate. If you think a room in the poorhouse without delay.

falak pema's picture

you misread him; he meant urination. As for your comment on holding fiat : unless its a Fiat cinquecento!

SheepDog-One's picture

Until suddenly theyre proven right, it will be an ugly day. 

LongSoupLine's picture

Thank you Fed intern troll...I mean "no mas" (wink, wink).

malikai's picture

Gold is fading the fuck out of the EURUSD cross.

Debtless's picture

Shorts never learn, and rarely get the timing right. Only insiders.

The Axe's picture

Of course this is all true...its also true that the Dow has exploded in the last 3 weeks..A massive rally...massive....

SheepDog-One's picture

And just think...all based on nothing. People can chase this all they want, Im not no thanks.

Taint Boil's picture



Like Mish says:

No structural problems have been solved ......

TradingJoe's picture

What goes up must come down! Today is epic for going short and stay that way! We are up 18% and counting on the S&P!!! The "pause" will be scary!

Diarhea's picture

When?! When is this artificial rally gonna end and be corrected?!

We're all screwed with that OBVIOUS pm's price manipulation.

Everybodys All American's picture

Angela does not have the leadership or backbone to leave the EU. She will be run out of office I suspect and then the Germans will leave.