Europe's "Great Deleveraging" Has Only Just Begun

Tyler Durden's picture

While Europe's financial services sector equity prices have retraced almost half of their May11 to Oct11 losses as we are told incessantly not to underestimate the impact of the LTRO, Morgan Stanley points out the other side of the balance sheet will continue to sag. While short-term liquidity (at least EUR-based liquidity as USD FX Swap lines are back at record highs this week) may have seen some of its risk culled, the real tail risk of the 'Great Deleveraging' has only just begun. As MS notes, we may have avoided a credit crunch but European banks could delever between EUR1.5 and EUR2 Trillion over the next 18 months as the unwind is far from over. History suggests that over a longer time-frame, around five to six years - the deleveraging could reach EUR4.5 Trillion assuming zero deposit growth and the LTRO will slow but not stop the process. As we discussed last night, this deleveraging will inevitably lead to continued contraction in European lending to the real economy (no matter how much liquidity is force-fed to the banking system) which will most explicitly impact Southern and Peripheral Europe and the Emerging Markets of Central and Eastern Europe.


Deleveraging has indeed a long way to go if history is any guide.Morgan Stanley sees four broad buckets of bank deleveraging likely:


In the meantime, we assume the Central Banks of the world will do the only thing they know, print and funnel liquidity to these increasingly zombified financial institutions; and while Dicky Fisher was calming us all down this evening on our QE3 expectations (given Gold and Silver's recent price action), it seems perhaps even the Fed is getting nervous at just how little surprise factor they have left given such a ravenously hungry deleveraging and insatiable need to maintain the market/economy's nominally positive appearances.

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kito's picture

congrats tyler, the deflationistas have taken direct aim at you. front and center!!

DoChenRollingBearing's picture

+ 1 more

Ashvin Pandurangi

I believe this is the same "Ash" who was a troll at  Also a self-admitted Marxist.  Good catch kito!

Nobody special's picture

LTRO will slow but not stop the process

Yes, because a slow and agonizing failure is much better than a quick collapse from which people can rebuild. </sarc>

The elite have the resources to withstand a slow collapse, while citizens do not. This slowing of the process is to make people dispair so they cry out in pain. It is not to save them. Bailouts serve the NWO agenda.

Oh regional Indian's picture

Europe's great de-leveraging..... how do you de-lever trillions?

And clearly this world CANNOT return to mark-to-market. In a mark to model world, who is the final arbitrer of price on books of any asset?

That is the key question, IMO. And if history is any precedence it will happen by war, the great re-set button.



spiral_eyes's picture

you print.

can't print gold, bitchez.

TruthInSunshine's picture

Global deleveraging is a potent force that wields a mighty hammer over Bernanke & the ECB (or the BOE or BOJ, for that matter), and in fact, the more Bernanke and his fellow fractional reserve conjurers push on a string, the more they reinforce that potent 'tsunami' (as The Automatic Earth describes this force).

The article you reference trips over its own argument somewhat near the end, when it finally mentions "debt deflation."

Deleveraging and debt deflation can be, but are by no means, the same thing.

Deleveraging can speak of future refusal by governments, businesses and consumers to assume new debts, while debt deflation isn't necessarily this phenomena at all (debt deflation can speak more to the form/manner of discharge/impairment/repayment of existing debt).

The ultimate question that needs an answer is what form debt deflation will take.

Creditor haircuts?


Currency debasement?

Global Jubilee?


That article on AE doesn't even take a stab at that issue, even after raising it near the close, and it's the most critical issue of all relative to whether inflation, deflation or stagflation (or some mutant hybrid) will be the prevailing and dominant future trend.

Sam Clemons's picture

I often wonder why the deflationists are so stuck on the idea that this boogey man debt (I call it the boogey man debt because it seems every country owes a bunch of other countries some money and no one actually wants to pay one another back, but still wants to borrow)  where they will get it from or will ever be paid back, or that even if it does get paid back, will be paid back in present value currency units.  Am I crazy, or does someone actually believe that most of the world's debt will be paid back in non-devalued currency?

Or as people see the writing on the wall for owning sovereign debt, mortgage debt, student loan debt, etc, and recognize that they won't be paid back in real or nominal terms, why wouldn't they start to diversify more heavily into another asset that is mostly undilutable, possibly gold?

TruthInSunshine's picture

Well, I am not staking any claim that you are wrong or right, but there are intervening and superceding events such as wars that do arise from time to time to settle the ledger in another form.

Two great examples of this were WWI and WWII.

Sam Clemons's picture

Didn't the US extend huge loans to European countries for those wars and never got paid back?  How were the ledgers settled by the wars?  And the last question isn't meant to spur thought, I'm actually asking.

TruthInSunshine's picture

AFAIK, the U.S. itself wasn't a big financial backer of any foreign sovereign regarding WWI, but we certainly financially backed our allies in WWII, after Germany fell under Hitler's spell due to the crushing reparations that threw her into a depression post WWI, and we certainly reaped the largest financial and economic benefits of helping the allied forces win WWII, as we received a global customer base for the most sought after products and goods, and more importantly, were given world reserve currency status (and we were able to sit down with Stalin & Churchill and divide up the global oil pie).

adr's picture

Post WWII instead of giving money to countries, we gave them equipment they needed to rebuild. This helped US industrial production greatly. Many European farmers broke down in tears when they were given brand new tractors and mules. Our American mules kicked the European donkey's ass in terms of productivity. It goes to say that many American industrialists believed WWII was the only way out of the depression, knowing the destruction of Europe would benefit the USA greatly. If it wasn't for Henry Ford, Russia wuldn't have lasted two months against the Germans. Ford hated the Nazis and the Soviets. He hoped a prolonged war would wipe them both out. He didn't like bankers much either.

falak pema's picture

Ford a NAzi : By conviction or corporate interest is the question. Or both. 

Well he didn't like the "jewish" takeover of US banking and Hollywood and he was an out and out WASP, so he resented America's melting pot evolution. He was not mainstream in that. Like Lindberg and other Wasps or Wasp copy cats like Old Irish malt  Kennedy. American Oligarchy culture has this ability at the top to be very "cut and run", in ideological terms, being a young mind set nation and basically pragmatic hands on type country; the movers and shakers change sides very easily. Its in their atavistic blood line. 

Its a great plus for a nation this supple back bone construct. Don't put ideology before hands-on, in the street experience. After all, all cats are grey in the dark and all women are worth a roll in the haystack if they be pretty and feminine; whether they be Greta, Marlene, Ingrid, Ava, Lana, Elizabeth, Marilyn, Jane, Nicole or Keira. Universal International made it America's dream as did MGM and exported it. Thats  the good side of US of A, not Guantanomolese and NDAA sauce for PAtriots who act like fascists.

 Maybe Ford had a bit of both : he was John Ford and Henry Ford, but didn't know when to draw his gun! That would explain him loving Nazis and he and his ilk, like Harriman, helping the Bolsheviks as well. 

Disenchanted's picture



Maybe it's best if one was to read Henry Ford's own words and decide for oneself what was his point, and not be told by others what to beLIEve about Henry Ford. So in that context here are Ford's original words:

The International Jew

falak pema's picture

What you say and what you do may not be on the same page. Henry Ford never actively put his own "final solution" in place. 

Hitler did and five years later it was all over. End of that. Ford died in 1947, so he saw his personal ideology, as published in the text you presented, brought down in flames. But he never "drew his gun" in its name...; he may have fanned the flames; real events occured too fast for that, maybe! 

History is a bitch. Your dreams stay dreams, whatever you may scream in private or in public. Words n deeds; the dividing line of western civilization. Nobody goes to jail for intent of murder if he doesn't commit it!

Its worth saying to draw the line between fact and possible intention. 

spankfish's picture

"all women are worth a roll in the haystack if they be pretty and feminine; whether they be Greta, Marlene, Ingrid, Ava, Lana, Elizabeth, Marilyn, Jane, Nicole or Keira" ... be careful with that statement.  When you are with a woman always apply Moulters Rule - never spend more than 4 hours with her and finished hit the floor running.  If not, you will became a victim of the Vagina Wars young man.

falak pema's picture

I did say : It was Hollywood! ...

linrom's picture

Nice fiction. The Soviets stopped the Nazis in '41 in front of Moscow.

TruthInSunshine's picture

Stalingrad from 42 to 43 was the huge turning point in WWII in terms of stopping Hitler's advance of armor/infantry (Nazi Germany failed to win gain any territory to the east afterwards while suffering massive casualties) and the opening up of two fronts (fighting the U.S./U,K to the south and west & fighting the Soviets to the north and east) was a critical tactical mistake by Hitler, with much of his top miltary advisers knowing to be the case, but too intimidated to challenge him on it.


Raymond Reason's picture

The Nazis couldn't take Leningrad either.  Most Americans don't realize that the theatre of battle there was 4 times the size of the entire Western Front.  In fact, it was the largest and deadliest theatre of battle in all of history.   We were given the American version in school, where the Soviets are reduced to "helpers". 

DanDaley's picture

Divide and conquer often works, and Hitler did it to the Germans in Russia; R.E. Lee he was not!

piceridu's picture

The Germans never had a chance...very astute linrom...nice to see someone that knows the real (hi)story.

Ropingdown's picture

JP Morgan Co's and Kuhn Loeb were extremely big lenders from 1914 onward.  If Wilson hadn't dragged us into WWI (despite running on the oppsite platform in 1916) Morgan Co's would have, at the very least, ended up much much poorer. 

disabledvet's picture

Henry Morgantheau. One of the greatest Secretary of Treasuries in history. Only Hamilton and JP Morgan can stand in those shoes. And of course Morgan created the only honest system of finance in a gold standard. Insofar as what the US economy got at the end of's really too long to list since most people simply devolve it to mere "dollar as reserve currency" and "industrial juggernaut" status. These two were easily the weakest links in the easily broken by Nixon as a soft necklace of pure gold to be smuggled into Korea or Taiwan. As we all now know "it was the media" that has created untold wealth on a scale not even imaginable by FDR when...having lied to Congress about the devastation of Pearl Harbor...he then brought in the media to tell them exactly what had happened...and put the USA on a path of political/economic dominion that stands higher today than ever. Come on up to Utica, NY. Pay a visit to the massive and long abandoned lunatic asylum. And then as yourself "why would such incredibly poor people build....

Sam Clemons's picture

Crap I messed up the above. 

Should say "this boogey man debt will ever be paid back."  No "where they will get it."

Long story short, it seems every country owes every other country some money.  Who actually owes who money?  Who actually intends to pay up honestly?

TruthInSunshine's picture

As far as I can tell, trade is the real method of debt and repayment.

Fiat currency not backed by anything of tangible value is just an inherently flawed scorecard to try and keep tabs on it all and quantify the activity.

Bunga Bunga's picture

All modern currencies are backed by debt (except Zimbabwe, Cuba, N Korea etc). For every dollar in circulation or deposits there is a dollar of debt, public or private.

Take a look at a random Federal Reserve Note. It prints: " This note is legal tender for all debts, public and private".

So a dollar is nothing else than a medium to pay debt. Since this legal tender status applies on every dollar, there can be outstanding only equal ammounts of dollars and debts.

GernB's picture

Then that would imply that the amount of inflation or deflation is related to the amount of debt. If all currency is backed by debt then the number of dollars chasing goods is related to debt and thus the cost of everything is related to debt. If people, corporations and countries stop borrowing then deflation must occur, regardless of what the Fed does (someone has to borrow the money the Fed prints).

itstippy's picture

Unless you simply print more money, debasing the currency. 

Since August 2007 Bernanke has taken the Federal Reserve's balance sheet from $869B to $2.5T.  Bank Of England has taken similar action.  They call it "Quantitative Easing", but it's really just printing money out of thin air and using it to buy up assets (Mortgage Backed Securities in QE1, US Treasuries in QE2).  The European Central Bank is now also doing the same thing (basically) with their Long Term Refinancing Operation.

This Quantitative Easing keeps asset prices propped up (stocks, bonds, securities), giving people the false impression that their investments are still performing.  But the assets are priced in currency (dollars, pounds, euros), and the currency is being debased, so the actual value of the assets is going down.

The Central Banks claim that they're taking the "unusual measure" of Quantitative Easing to stimulate the broad economy, encourage investment, reduce unemployment, and promote growth.  Nope.  It's really a desperate attempt to keep overvalued assets pinned at their overvalued "worth" so the people and institutions holding these assets don't have to acknowledge the fact that they are insolvent because they paid way too much for risky, shitty assets. 

Somehow Bernanke & Co have convinced Joe The Plumber that The Fed is there to help him.  Joe The Plumber is too ill-informed to know differently, and too lazy (or scared) to find out the truth.  He sticks to being extremely knowledgable about professional football. 

oogs66's picture

Joe the plumber? What about all the CNBS cheerleaders who should know better?

And why isn't mainstream pointing out that QE only encourages banks to buy what is getting QE'd and avoid lending

RecoveringDebtJunkie's picture

"Deleveraging and debt deflation can be, but are by no means, the same thing."

That's a fair enough point, but I find it hard to argue that debt deflation can occur through currency devaluation, i.e. debt devaluation or inflation of debt.

As for answering the question of what form debt deflation will take, that has been a central aim of TAE for years now. Take a stroll through the archives or the primers. You would probably be pleased to know that dollar HI is viewed as the inevitable endgame.

Matt's picture

What an interesting coincidence, The Automatic Earth article from January 31, 2012 post used the Buzz Lightyear quote the very same day I did.

Sam Clemons's picture

"To see what is in front of one's nose needs a constant struggle." - George Orwell

Oh regional Indian's picture

Excellent quote, thanks Sam.


Sam Clemons's picture

You usually provide great comments - thank you for them and for this.  Sorry for being a douche to you in the past.

Oh regional Indian's picture

You are welcome and all good Sam. Many strong/well read minds here, so being opinionated is a given.


linrom's picture

Wow, I missed the blog? What a tremendous find. If you look at what he reads, the list is made up of Who is Who, of those that foresaw the present GFC.

I am no longer a fan of ZH either. The blog is becoming another MSM propaganda tool in a war against the underprivileged classes.

chubbar's picture

It's National NDAA protest day. Please call your Congresscritter or email using the links below by writing your own letter or copy/paste the one provided below and using the link immediately following the letter.

"TODAY, Friday, February 3 is NDAA Protest Day. Thousands of patriots will be protesting at local Congressional offices.

YOU can participate in the protest, even if you are unable to attend in person. But first...

Some Background

NDAA is the National Defense Authorization Act, signed into law by President Obama on New Year's Eve 2011. Sections 1021 and 1022 authorize the President to "indefinitely detain" (kidnap) ANY person - American or non-citizen - without bringing charges and without a day in court. Learn more.

The Tenth Amendment Center asked President Jim Babka to present a detailed yet plausible scenario, whereby these kidnapping provisions could be used to snare activists.

The Backlash

Anger toward the NDAA was immediate. fought against the bill before passage, and launched its repeal campaign on January 9. At least three repeal bills have been proposed. Regrettably, none are sufficient...

  • Rep. Ron Paul's bill HR 3785 repeals Section 1021 but not 1022.
  • Rep. Jeff Landry's HR 3676 would restore Constitutional protections for American citizens but denies them to foreigners -- even legal residents.
  • Sen. Diane Feinstein's bill S.2003 restores due process to American citizens and lawful alien residents but seems to deny even a citizen’s due process rights if apprehended on foreign soil.

In addition, citizens are working through their states and local communities to communicate their opposition to Sections 1021 and 1022. For instance...

NDAA Protest Day

The event is TODAY from noon to 7pm at your Representative's Congressional District offices throughout the country. Downsize DC is not involved in planning or coordination these in-person protests, but it appears that you can come when you can, as long as you can.

If you are able to attend, you can locate the office nearest you here:

More information here:

If you are unable to attend, then PLEASE call Your Representative and Senators.

To call, go to your Downsize DC "District Information" page. If you're logged in that link is located in Your Toolbox. It contains each of their phone numbers:

Here are a few words you can use...

It is a cowardly act to surrender our freedoms in the name of fighting terrorists. Please introduce legislation that repeals Section 1021 and 1022 of the NDAA and restore strong due process rights for all.

BUT IF YOU DO NOTHING ELSE, send a letter: Go to's Repeal Indefinite Detention Campaign.

You may borrow from or copy this...

It is often said that terrorists hate us because of our freedom.

So if we give up our freedom in the name of fighting terrorists, doesn't that mean they win?

That's a cowardly act!

It started with the Patriot Act. It continued with other terrible bills such as the Military Commissions Act. But Sections 1021 and 1022 of the NDAA endanger EVERYONE's freedom.

These provisions authorize the military to kidnap any person whom this, or any future President decrees is a "terrorist." Non-Americans and Americans alike. On foreign soil AND our soil. For as long as there are "hostilities," i.e., possibly forever.

What if any other country passed such a law? Would you travel there? Wouldn't our own State Department condemn such a human rights violation? Would you call its people "free" or "unfree?"

The power to kidnap, to "disappear" people, is the mark of a backward tyranny.

The NDAA destroyed a legal tradition going back to the nearly 800 year-old Magna Carta. The protection of persons from arbitrary arrest and imprisonment is the very foundation of a free society. It's one of the crown jewels of civilization. It makes us feel fortunate to live in a country like the United States.

Make us proud to be Americans once again.

Please introduce legislation that repeals Section 1021 and 1022 of the NDAA. Restore strong due process rights for all.


You can send your letter using's Educate the Powerful System.

Thank you for taking part. Encourage your friends to do the same!

James Wilson
Policy Research Director, Inc.


D o w n s i z e r - D i s p a t c h

Official email newsletter of, Inc. & Downsize DC Foundation."

ACP's picture

The what? The great De-Re-De-Re-Re-Leveraging? Print money, lose it, write it off. Print money, lose it, write it off.

Fuck it, gold bitchez!!!

You can't print it, and you only write it off if you lose it!!!

RiverRoad's picture

And a great sucking sound came upon the Land...

rosiescenario's picture

"while Dicky Fisher was calming us all down this evening on our QE3 expectations (given Gold and Silver's recent price action)"


Looking for the CME to step in again and raise the margin requirements on the pm's...Ben has a memo to them on this subject....lets make sure that no one gets the idea there is any inflation so lets crater the pm's....


Tomorrow would be a good day for them to do this....

kito's picture

just who exactly is the cme going to shake out? its last remaining investors? last i checked, the mf global implosion was the ultimate margin hike.....

JPM Hater001's picture

I'm lost. So who had sex with who again and why is Chandler mad at Joey.

Please, someone explain if I were phoebe...please...

Bringin It's picture

perhaps even the Fed is getting nervous at just how little surprise factor they have left

Re. nervous.  BDI Don't lie.

Ropingdown's picture

The pitchfork factor, Republican Congress factor, too, might be kicking in.

GernB's picture

I'm not sure it matters who is in congress. Eventally it will dawn upon everyone what their share of the national debt is, how big is it relative to their income, who is reaping the benefit of the taxes collected to pay the debt service, and just how close we are to being unable to ever pay it down. When that happens voters will stop the borrowing regardless of who is in power. If they have to change who is in power to do it, they will.

CrashisOptimistic's picture

I continue to have problems with declarations of "deleveraging" when governments are running deficits of hundreds of billions in the EU and over a trillion in the US.

Does a trillion dollar borrowing look like deleveraging to you?  No.  What it looks like is moving debt from bank balance sheets onto the taxpayer's balance sheet.