Decision Time For Europe: The Definitive Presentation On The Future (Or Lack Thereof) Of The Eurozone

Tyler Durden's picture

When dealing with the daily barrage of headlines from Europe, it is easy to get lost in the trees and forget what the forest looks like. That's perfectly understandable - after all, it is precisely the intention of the Eurocrats to confound everyone with noise, so any track of the fact that the big picture is unfixable is if not lost then promptly forgotten, with reactionary newsflow dominating the flawed decision-making process. Luckily, the fact remains that no matter what, no matter the scale of lies out of Europe, the problem still remains: the math just does not make any sense. Conveniently reminding us precisely of this, we present to our readers the must read presentation by Swiss private bank Pictet titled "Decision time for monetary union" which puts the forest right back into focus, and explains why all attempts to kick the can down the street will be met with a prompt and furious response by the bond vigilante crowd, which has now officially been thawed out of cryogenic stasis. Because, all noise aside, the Eurozone has two options - continue the current course which is catastrophic: "Current response to the crisis has created conditions leading the euro area towards depression" or accept the reality and do something about it, yet "things are going to get worse before European authorities decide to wheel out their heavy artillery." Said otherwise: lose-lose. So without further ado, let's dig in...

1.Italy has put its head above the emergency parapet

2. The good news: Italian public accounts well on track

  • Italy and Germany are the rare countries likely to record primary surpluses in 2011

3. The bad news: Italian public debt: a weighty millstone


4. All benefits from the creation of the euro have been erased: Spreads above levels prevailing before the euro's birth

5. The light at the end of the tunnel is a trillion and a half euro oncoming train: €1,500bn to be financed in peripheral euro area states between now and 2014

6. From Arab Srping to European Winter: Winter and springtime will be busy seasons for refinancing

7. Surveys now clearly in recession territory

  • Only the post-Lehman deterioration was as rapid as the current downswing

8. Orders/inventory ratio has continued to deteriorate

  • As a result, production has to be scaled back further

9. The bad news: Recession looming

  • Q3 should turn out better than heralded by surveys, but full-blown recession is likely to hit this winter

10. The worse news: Threat of a credit crunch looming

  • Bank deleveraging will translate into shrinking credit

11. The worst news: Current response to the crisis has created conditions leading the euro area towards depression

  • Germany's refusal to back other member states' debt has brought about a savage repricing of the risk. Highly indebted countries have become insolvent owing to the steep increase in their debt-servicing bills.
  • The German recipe for solving the crisis is geared towards deleveraging all economic agents simultaneously. This is
    utopian. This policy will brutally
    • depress aggregated demand – most European economies are likely to sink into recession this coming winter
    • limit the availability of credit
  • This is the route that led towards the Depression of the 1930s.


12. What can be done -  a blend of measures:

  • German recipe combined with a lack of means will not stop the crisis spreading
  • Response should be two-fold

1 . Urgent measures: stop the haemorrhage

  • ECB interventions to be increased (SMP: 180bn)
  • EFSF guarantees (<300bn leveraged to 1,000bn)
  • IMF precautionary line of credit ($300bn currently available)
  • ECB large-scale guarantees (theoretically unlimited)

2. Long-term solutions: save the euro

  • German recipe
  • pro-growth policy on the periphery (EU structural funds, EIB investment projects)
  • stimuli in creditor countries in order to foster domestic demand
  • increase transfers (fiscal union, euro-bond, etc.)
  • public debt restructuring
  • members exiting

13. ECB has bought €110bn since resuming sovereign bond purchasing programme

14. Even after full monetisation, the ECB's expansion will remain below the Fed’s

  • If the ECB finances the entirety of peripheral countries' financial needs up to 2014 (€1,500bn), its balance sheet will expand by 2.6X compared to its pre-crisis level

15. Euro break-up would represent massive loss of competitiveness for Germany

  • Expected devaluation on the periphery (in the range of 30%-40%) would hit German exports hard

16. The opportunity cost: Germany's huge external assets would suffer from a euro break-up

17. The cost of a euro break-up: Germany particularly exposed to a euro break-up

  • Without wholesale 'socialisation' of euro area members' debt (through a form of fiscal union, ECB guarantees), the current situation is likely to move towards a break-up of the euro.
  • A euro break-up would have dire consequences for all euro area countries
    • banking systems severely shaken
    • loss of competitiveness for core countries
    • massive asset haircuts due to defaults on the periphery
  • The overall cost of a euro break-up is likely to exceed the bill for the bail-out by a significant amount.
  • Creditor countries' reluctance to bail out is not motivated by a lack of means, but by their determination to avoid moral hazard
  • When sufficient evidence has been accumulated for Germany to guarantee future adherence to fiscal discipline in peripheral countries, the German authorities could opt for further fiscal integration

18. All sovereignty abandon ye who enter: Sovereignty progressively transferred from the periphery to the EU

  • The European Commission (EC) has established a monitoring capacity on the grounds of ensuring compliance with the Greek adjustment programme.
  • Surveillance of member states' budgets under the so-called 'European Semester' by the EC and the EU Council through
    peer pressure
  • EC and the EU Council will be allowed to examine draft national budgets and pass judgement on them before they
    are adopted by the relevant national parliaments
  • Members' ability to challenge EC decisions to launch disciplinary proceedings against profligate governments would be curtailed

19. Scenario: Things are likely to get worse before authorities adopt definitive measures, as confirmed by today's interview between the FT and Jens Weidmann

  • Changes in government on the periphery (Greece, Italy, Spain) could offer some temporary relief as adjustment programmes will be easier to implement.
  • But the benefits of adjustment programmes are likely to disappoint again as recession will probably hit home next winter.
  • So, the crisis of confidence related to imbalances between the huge financial needs and the responses in terms of aid packages will continue to loom large.
  • At this point, pressure will mount on the ECB to step up its intervention significantly. This action will offer the relief needed to give authorities the time to mould the new shape of monetary union
    • institutionalise a form of fiscal transfers
      • European Monetary Funds, fiscal union or euro-bonds…
      • new Treaty
  • The euro should survive, but things are going to get worse before European authorities decide to wheel out their heavy artillery

20. Greece: only €120bn out of €280bn debt held in private hands

  • Reducing public debt to sustainable levels without affecting official holders implies haircuts harsher than 50% for the private sector

21. Periphery bidding for the bulk of the ECB’s liquidity

  • Periphery (34% of GDP) bid for 67% of the ECB’s liquidity

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slewie the pi-rat's picture

even the loose change in the couch is already spoken for...

malek's picture

Ja! It's all the German's fault!

He_Who Carried The Sun's picture

Go read the interview with Bundesbank's Weidmann on ft/US and drive your eyeballs through some carwash in order to get rid of the 'blurrrr'...

"The role of the central bank is clearly defined. It is to ensure price stability and to support the competent authorities in ensuring financial stability. With this formulation, it is clear that the responsibility for financial stability lies with governments."

Goldman Hufs's picture

Yep, nothing like a drug dealer calling his customer a junkie after he can't pay anymore without every acknowledging the fact that he was the one supplying the client with increasing dosages of smack over the years.

DeadFred's picture

A lot of people have a lot of fiat riding on what a small handful of German officials. How confident are you that they will do what is best for Germany and the world rather than what is best for themselves? There are a lot of ways to convince someone to turn on his/her countrymen. Take into consideration that most of this handful are politicians.

He_Who Carried The Sun's picture

Where did you grow up? Kongo Republic, Guatemala? This is Germany you're talking about, don't worry, they will defend their Bundesbank to the last!

jeff montanye's picture

imo the fiscal union with austerity that the post holds out as a medium term "solution" will not survive even the vestigial democracy still extant in europe.  especially in even a "mild" recession.  the banks are insolvent.  the financial "services" industry really, really, wishes that were not the case. but it is.  and endless bailouts will not fix it.  ASK JAPAN!  

an organic recovery cannot happen until the banks are restrained and reformed and transparency re: counterparties is restored.  some major reregulation to control derivatives, end the possibility of many, many mf globals, separate "investment banking" from "commercial banking" and, not least, reform campaign contributions from corporations, etc. must be done.

imo the best on this subject:

malek's picture

Maybe I should have added a /sarc tag to my post... In a time of Universal Deceit, telling the Truth is a Revolutionary act. Just like preaching austerity in an empire of gluttony.
Weidmann is correct, but he will be silenced or removed from his post quicker than you can imagine...

I think I need to buy a gun's picture

so when are those european bankers going to turn their physical gold into real claims?



DosZap's picture

#18, is the GOAL of the entire debacle.

Element's picture

The numbers and the graphs mean nothing in a fiat whirld, the only thing in play is #18, it's the reason they don't want to see the Euro and EU Commission get de-fanged by eruo apostates leaving the flock.

"no! ... ramming speed!! ... we'll surprise it! ... and sink the iceberg instead!" - Ollie's epitah

The Big Ching-aso's picture



Just because they call it a union doesn't mean it is one.    The Euro situation is akin to New York and Wyoming willingly and enthusiastically becoming sister states.

tempo's picture

Or CA and Texas having common goal and objectives.  Of course, I am from CA and love receiving entitlements paid for by Texas.  Thank you Texas for the love.

knukles's picture

Well, SF and Houston could be sister cities.

longonSpam's picture

In what alternate dimension? Fuck Houston, fuck Texas and fuck das Bundesbank

paarsons's picture

Good Citizens of Metropolis,

I no longer care about the Eurozone.

I just want a larger cock.

Is that too much to ask for?

monopoly's picture

And have a nice day! Geesh,they are toast!

bigkahuna's picture

Is this the end of the beginning or the beginning of the end?

RockyRacoon's picture

Looks like a depression is in order.   And the U. S. not be far behind.   That #14 chart is a buzz-killer, eh?

Manthong's picture

After the next big market drop, the Fed will be go for "throttle up".

.. or maybe more aptly, "warp factor 9".

jeff montanye's picture

qe 1 and 2 were surprisingly impotent, imo.  got a weak recovery from 1 after a huge drop in gdp and a mild ramp up in equity prices from 2.  both now seemingly fading big time as republicans and obama here and bundesbank hawks and euro "visionaries" there compete to reduce debt through austerity.  

world fiscal policy is becoming contractionary in a deflationary, deleveraging depression.  monetary policy is zero bound, in a liquidity trap, pushing on a string, yadda, yadda.  

we have an epic but vain attempt to disguise near universal insolvency with an increasingly unconvincing facade fronting corruption, venality, fraud and theft on an unprecedented scale.

longonSpam's picture

At least it'd be honest, bring it on.. I actually kinda like bean soup and I have plenty of shoes when the beans run out.

UP Forester's picture

Good thing I'm going long canned venison....

LookingWithAmazement's picture

Eurozone: printing bitchezzzz!

Where's that hyperinflation? Or will the dollar crash after the failure of the Supercommittee and the unwillingness of Obama to cut big time?

vegas's picture

From where I sit, the forest is on fire.

Politicos long ago pissed away valuable credibility by dragging their collective feet; bringing out worthless trial ballons to see if the market would bite.

They are now left with no easy choices, and no time to make them. Don't expect a pretty outcome

lizzy36's picture

Yes, post election 2012, is looking more and more like post election 2008 (stock market wise).

But between now and then perhaps just lots of lots of foreplay? (UGH)

They will juggle these balls for as long as they can. The longer they do, the greater the chance they all fall at once (see fall of 2008).

Seasmoke's picture

its going to be a spectacular crash !

Richard Whitney's picture

Regarding #18: Sounds OK to me. But surrendering sovereignity and fiscal unity is not a one-way street. The EU countries should also lose their national seats at international bodies, starting with the U.N.

BoNeSxxx's picture

The U.N needs to be disolved.  Private.  Worthless.  NWO tool.

Oh regional Indian's picture

Indeed Bone. BEcause along with the UN will disappear so many other alphabet agencies that are th ereal Vampire Squid.

World Bank, IMF, UNESCO, UNDP....... those are the tentacles. And now of course their Blue Helmeted Peace-keepers (Drug Trafficers, Child Rapists actually).....

But the UN is also just a front.

Secular Humanism, FTW!


Caveat Emptor

Freebird's picture

Pictet are pretty darn good & not a primary dealer, so refreshing - tx, even if they are pond scum bankers

cowsense's picture

More noise. They have already picked the stud that's going to oversee the EU. We'll all meet him soon.

DeadFred's picture

and be very unhappy about it. What could be worse than Goldman ruling the world?

DormRoom's picture

It's nice to hear how the EU is getting advice from JPMorgan.  The same outfit that advised Jefferson County, the largest Muni bankruptcy in US history.




catch edge ghost's picture

I liked the part about sovereignty.

Now I want someone to make little plastic green bankers for me to play with.

MrPalladium's picture

Gotta love those short term measures!


"ECB interventions to be increased (SMP: 180bn)
EFSF guarantees (<300bn leveraged to 1,000bn)
IMF precautionary line of credit ($300bn currently available)
ECB large-scale guarantees (theoretically unlimited)"


Massive money printing to mop up all bad sovereign debt.

Money printing in the short term and then stern discipline later!!



gjp's picture

Yep, we promise we'll be good, but in the mean time we want unlimited guarantees ... The debt will never be paid. Stop pretending. The interest burden is killing the economy, not half-hearted austerity. F*** pictet and all other advocates of monetary destruction.

caerus's picture

usdx will go to 75...carry on

Tater Salad's picture

Houston, we have a problem!



Caviar Emptor's picture

Since Freidman, central bankers have insisted that capitalist economies could be in a state of permanent prosperity if the wizards were just allowed to practice their dark art. 

Well it's the future and we've got a huge hangover. The wizards are still mixing their potions.  

catch edge ghost's picture

Presume at least one or two of them over the decades in fact did understand math and knew that infinite growth is an impossibility.

An elaborate double secret central plan to transition to a sustainable era of zero growth could hardly not exist.

Georgesblog's picture

The timeline is now dictated by the debt service schedule. Think of it as a margin call on the GNP of Europe.

pudding's picture

The european is just slow, too slow

twotraps's picture

The Euro is a political construct....they are in a jam due to economic as much as politics.  They want the 'magic of the market' and hope it covers the promised social safety net.  It should be interesting to see what they come up with.  Its funny to see the phrase 'crisis management' lumpted in with the latest meeting.....seems this crisis is throwing Europe around like a rag doll!  Not inspiring much confidence.  Real question is how can we make money from this??