ECB's Stability Review: Seven Charts Of The Sovereign SNAFU

Tyler Durden's picture

It is no surprise that the ECB has been less than overwhelming in its optimism, unlike Messers Barroso, Van Rompuy et al. when discussing the current and future state of the union that is Europe. While not pessimistic per se, the focus on zee stabilitee and lack of bazooka (no we don't see the 3Y LTROs as a magic bullet) is perhaps related to their view of the difficulties faced in addressing the needs of an increasingly disparate gaggle of countries. In their December Financial Stability Review, the ECB points to four key risks: (contagion, funding, macroeconomy, and trade imbalances), they fear "euro area financial stability increased considerably in the second half of 2011, as the sovereign risk crisis and its interplay with the banking sector worsened in an environment of weakening macroeconomic growth prospects". Summarizing into seven charts, the ECB provides a quick-and-dirty perspective on what is increasingly becoming obvious as capital flows and funding needs interplay with one another (for worse rather than better).


Four key risks to euro area financial stability

  • Contagion and negative feedback between the vulnerability of public finances, the financial sector and economic growth
  • Funding strains in the euro area banking sector
  • Weakening macroeconomic activity, credit risks for banks and second-round effects through a reduced credit availability in the economy
  • Imbalances of key global economies and the risk of a sharp global economic slowdown


The first key risk, arguably the most important, concerns the potential for a further intensification of contagion and the negative feedback between the vulnerability of public finances, the financial sector and economic growth...

...the vulnerability to further contagion remains highest for those countries that are perceived to exhibit a combination of vulnerable fiscal positions, weak macro-financial conditions, and the potential for further significant losses in the banking sector.

Despite several national initiatives aimed at improving fiscal fundamentals, as well as the announcement or adoption of supranational initiatives to stem stress, contagion effects have spread widely across euro area sovereigns and banks...

...the possibility that more euro area sovereigns will, as a consequence, face difficulties in refinancing their debt remains among the most pressing risks to euro area financial stability.

A second key risk concerns market funding strains in the euro area banking sector...

...a risk which has been aggravated by an abrupt rise in term funding costs in several euro area countries and significantly lower bank equity prices.


The term funding needs of the euro area financial sector remain challenging, and the situation could become more difficult...

...particularly if headline risk and the market volatility associated with the fiscal and/or financial strains in the euro area persist.


A third key risk concerns an increase in credit risks for banks in conjunction with the slowdown in economic activity, and possible second-round effects through reduced credit availability in the economy... stability risks stemming from the euro area non-financial corporate and household sectors have increased as a result of the deterioration of economic prospects.


Higher credit risks could be exacerbated further by the possibility of an adverse feedback loop...

...whereby a restriction in credit availability prompts a deterioration in the economic outlook and in the quality of banks’ assets that, in turn, triggers an additional tightening of credit conditions.


A fourth and last key risk concerns the external environment for the euro area, namely the risk of an abrupt unwinding of imbalances in key global economies that could result from a sharp global economic slowdown...

...specific concerns include fiscal and economic weaknesses in
key advanced economies across the globe, and a sudden halt of private
capital flows to emerging markets

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richard in norway's picture

debt rollover bitchez

baten's picture

Man, I dont know - everybody and his dog is predicting a collapse in the first part of 2012, so much so that I am starting to believe that the actual contrarian view is that nothing will happen. 

youLilQuantFuker's picture

Ah, some excellent arb opportunities you say? Hummmm.

Ghordius's picture

excellent point and excellent avatar


No, I expect more turmoil. With all this cash sloshing around everybody and his dog is going to short something until it breaks. This "something" varies according to the fashion of the month, of course...

maxw3st's picture

Excellent overall review of the year to come. Charts are most helpful in graphically demonstrating the issues. Covered bonds and senior unsecured debt seem to present the greatest challenges.

fcamargoe's picture

Tyler great post just a comment regarding the first point on "negative feedback" loop between public finances, financial and economic growth; the reference is completely wrong. What they are describing is a positive feedback loop as each variable contributes to the other and function by the power laws. Idiots. This was written by intelligent people with knowledge of math and I would assume at least some vague understanding of non-linear dynamic systems which they are referencing. 

youLilQuantFuker's picture

Do you spend your whole day splitting cunt hairs?

Going Loco's picture

Lack of understanding of basics like this is just par for the course. The MOST astonishing thing in all this is the level if incompetence and ignorance among the governing classes. When I read about the lack of a proper term sheet for the first iteration of EFSF... and the mission to China to try and get them to sign up to an undocumented bailout...  and the foundation of the bailouts being capital and/or guarantees from bankrupt entities... I realised that those in control have lost control and haven't got a clue what to do next. Not a clue. They are absolutely clueless.

I just read the comment above mine. I do love the dichotomy between intelligent perspicacious comments on ZH, and profane idiocies such as that posted by the utterly execrable and curiously named " youLilQuantFuker". 

youLilQuantFuker's picture

What I enjoy is seeing the smarties mandate the /sarc tag because they cannot figure it out.

youLilQuantFuker's picture

I'm surrounded by stupid geniuses.

WhiteNight123129's picture

Your problem is not to be surrounded by stupid geniouses, or just by people for that matter, but to be surrounded by yourself. ... Does it feel vacuous?

youLilQuantFuker's picture

Speak of the devil. I thought they would send 'Heywood Jablowme'.

fcamargoe's picture

Hey calm down where's the holiday spirit. Ran out of moonshine? Out of sniffing glue? Chill no one is perfect u can learn also from the mistakes from others as from yours. 

bpom's picture

The first chart clearly shows that compared to the Soap Dodgers, Belgies, Spitalians, etc.,  the Krauts have the best credit, excluding the Limeys of course - SUSFU Charlie Foxtrot.

Ghordius's picture

Who are the "Soap Dodgers" supposed to be? Go and crawl back beneath your usual rock until you realize that your national slurs are idiotic...

bpom's picture

The soap dodgers are frogs, the inventors of soap.

bpom's picture

New news that the Krauts have the strongest credit or that frogs are soap dodgers?

GMadScientist's picture

Try the Babylonians ~4800 years ago; the French only developed perfume.

bpom's picture

Your're right.  Soap was born in Babylonia, moved to Arizonia, used by the gauls and shunned by the romans.

pineyard's picture

Thanks for the LINK ... I will study it in detail

But ONE THING in my opinion is ALSO in its place to say here after having scimmed the Report  : and that is what a SOBER and STRAIGHTFORWARD REPORT , outlining facts as the are ...  GREAT JOB  ,, from the European Central Bank .. and in STARK CONTRADICTION to the SMOKE SCREENS issued by its equivalent  ..The FEDERAL RESERVE SYSTEM