Europe's Risk-ually Transmitted Disease

Tyler Durden's picture

Remember when Lehman or Bear Stearns was 'too small' to matter and 'subprime was contained', we we are getting same ignorant first-order analysis now with regard Spain (or more broadly-speaking Southern Europe). The whole of Southern Europe is only 6% of global GDP - how can that matter? (especially when we can eat iPads?) Michael Cembalest, of JPMorgan, provides some much needed sense on why these small countries pack a large disruption risk punch for global markets and economies. By breaking down the world into a few categories of disruption risk, the JPM CIO notes that the southern strain of Eurovirus has a much larger non-proportional impact thanks to transmission risk via its significantly greater share of sovereign and bank debt relative to the world and how these debts are financed. The transmission risk to the much-larger Northern Europe is material. We are already seeing Germany's new orders from within the Euro-zone slumping and this week's business sector surveys were very weak. As Cembalest concludes, from an alien's perspective, Earth may be able to outrun the collapse in Europe’s periphery if the ECB keeps printing money and the IMF increases its firewall, but it’s not going to be easy.



The table above breaks Earth down into a few categories, with the ones at the top representing less near-term disruption risk in our view. In principle, the strength of commodity countries, much of Asia and Latin America would offset Southern European problems. In addition, China has the scope to relax monetary and/or fiscal conditions, which we think will be necessary given the sharp decline in China’s private sector growth trend.

That being said, Earth’s problem with Southern Europe is one of transmission risk and non-proportional impact:

  • While Southern Europe is only 6% of global GDP, it has a higher representation of the Earth’s sovereign debt and bank debt. In recession, the region causes more than a proportional problem for the leveraged financial system described on the prior page. Even with German and French bank claims on Southern Europe having fallen in half since 2007 (see page 6), potential losses on remaining claims still represent a large percentage of European bank capital.
  • The table shows what each country reports as its sovereign debt, but these figures may be underestimated. Spain’s central government and regional debt is reported at 68% of GDP. After accounting for bank restructuring costs, write-downs on development bank loans, potential losses on government guaranteed private sector debt, and possible losses on Spain’s share of loans to other countries in Southern Europe, we estimate Spain’s debt as being ~85% of GDP.
  • The table does not capture how countries finance their sovereign debt. Japan’s sovereign debt is large relative to its GDP, but is 93% owned domestically; and the US is (for now) the world’s reserve currency. Southern Europe’s reliance on crossborder capital required the ECB to take extraordinary steps to offset it when it fled.
  • The transmission risk to Northern Europe is material. As shown below, the collapse in Germany’s new orders from within the Euro area is substantial. This week’s business sector surveys in Europe were very weak, and the only surprise to us was that people were surprised. The French and German economies are stagnant right now.

Economic strains in France contributed to increased polling for the National Front, and the Netherlands is struggling with the fiscal compact just agreed to last year. Germany may have to decide sooner rather than later if, how and when it will pay the freight of European fiscal integration if it wants to preserve the Euro. Earth may be able to outrun the collapse in Europe’s periphery if the ECB keeps printing money and the IMF increases its firewall, but it’s not going to be easy.

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SheepDog-One's picture

'U.S. 'OK' as long as 'fiscal cliff' doesn't hit hard'.....well what could possibly go wrong with cntrl-prnt Bernank at the helm...and how can you 'hit' a cliff anyway? Just sail right over that cliff good as Wille E. Coyote.

ihedgemyhedges's picture

Read your tagline TD and thought you were bringing up DSK again...........

bank guy in Brussels's picture

Time for another Brussels EU leadership meeting

Sandmann's picture

it is always bemusing to think of GDP when Debt > GDP. Like max Keiser today sepaking with Michael Hudson and looking at JP Morgan with $70 Trillion of Derivatives equivalent to Global GDP backed by a 50-80% Share of Copper Trading Contracts and a Host Nation with only $14 Trillion in GDP leveraged with $15 Trillion in Debt.

Deutsche Bank has sufficient exposure to blow Germany apart but the USA is quite an interesting scenario. It is like Alice Through The Looking Glass because once you are in the mirror world or parallel universe there is no limit. the Anti-Matter Debt World is not constrained by Physical Assets and can grow exponentially, and it seems it does.

So, it will be interesting to see how much Violence is needed to resolve matters and that Dmitry Orlov is being proven correct


NotApplicable's picture

Then there's that "Spain is only 6% of global GDP" factoid. Given Greenspin's old friend "cascading cross-defaults," and doing a little math, it appears that global leverage better not go above 16.67 if there's any exprectation of "containment."


Dick Darlington's picture

The table shows what each country reports as its sovereign debt, but these figures may be underestimated. Spain’s central government and regional debt is reported at 68% of GDP. After accounting for bank restructuring costs, write-downs on development bank loans, potential losses on government guaranteed private sector debt, and possible losses on Spain’s share of loans to other countries in Southern Europe, we estimate Spain’s debt as being ~85% of GDP.

Oh, it is much higher. Take a look at the stats from BoS. Official debt/gdp at the end of 2011 was 68,5% (EDP methodology ie eurostat figure). The debt/gdp according to the "financial accounts of the spanish economy" was 86,8%. On top of the latter "closer to truth" figure You can start piling the endless contingent liabilities and what not...


And here is the same stuff in absolute values:

SheepDog-One's picture

'Objects in rear-view mirror may be larger than they appear'

NotApplicable's picture

Add to that the fact that they're driving in reverse with the accelerator mashed to the floorboard, and yeah, it will all end well.

WhyDoesItHurtWhen iPee's picture



"when you're backing up, things tend to come up from behind you."


carbonmutant's picture

That blue line on the chart would climb if the EU countries lowered prices... (cough...reggiano parmigiano...cough)

tempo's picture

S EU doesn't matter as long as Germany can push the holding cost to France, China, US, Japan. Its all about not getting the "old maid" when the game ends.

DormRoom's picture

It's not the size, but how interconnected it is.  Southern Europe is too interconnected (German exports to the South) to fail.


Southern Europe has all but failed. 




BlueCollaredOne's picture

The EU has herpes, but is trying to tell us its just a fever blister

l1b3rty's picture

They're all printing dollars! Everyone everywhere producing crack so that the pimps can get some discipline!

SheepDog-One's picture

You ever get the feeling youre just in the back of the bus being told to sit down and shut the fuck up day after day?

Sick of all this 100%, always some reason markets cant reflect any reality, today for Apple earnings, and thru the rest of the year 'election', and after the election nonsense back to 'euphoria rally' or some other utter bullshit...I think its all just shit and they have no idea what to do next. 

q99x2's picture

The Morgue's derivatives are all interlinked and worthless. Fk'em.

vamoose1's picture



    Sorry you  beardos,   i  do  not like beards,  they get grown  for reasons. i see the Dow up a hun,  and nasdaq  down  2,    and volume trading by  appointment, totally effing ridiculous, i recommend people read dan norcini  over at  KWn  and ponder. Dan  is ramping lately,  unusually,  i think he sees it dead ahead,  iceberg.

    Corzine,  unindicted thief, cowering behind a beard,  the bernank, oh for  chrissakes   how fucking transparent can the racket be, beautifully trimmed beard to  match  his perpetually  trembling lips as he wrestles with a balky conscience telling nosestretchers to  the frigging horizon, probably the guy was well brought up,   but in  6 decades i have never seen a worse public sector liar,   and darling jeff Christian,   same bat channel,  an even  bigger beard...  do  we require an  engraved invitation,  people hide behind beards the better to  lie, not all,  so  sorri you  legits,    but these foul  hounds,  jesus god...... we are close people,  we like kickin....  oh  yeah? Govern accordingly,   one fine day  its NOW    Salut.

vamoose1's picture

Jimmy Rogers said it rather succinctly yesterday,  we have something like 40  elections teed  up  in the next year,  well,  with  youth  unemployment  at or past 50  percent,  i  mean  cmon,  the 200 year myth  is going to  be called,    its over,  this is   critical mass.

    What genius was watching the Netherlands???? NOBOdy,  not a solitary soul  a total  whiff,  then  BANG,   flap  flap  black  swanny river  we have spent the available credit,   every Sovereign  is fatally compromised ,  borrowed up  to the gunwales, puis, then  it ends, as it always has,  as it must.  Ten Thermidor. 

vamoose1's picture

Forty years investing peoples money to  2002,  wonderful, some were pleased , a preposterous orgy of credit,   but  the stocks appeared to  go  up, nope,  the numerator attrited,  a fucking mirage,  a wasted enterprise, I look at the august United States,  yes  with a tear, 50  million   (understated)  on FOOD STAMPS????????  lets kindly be serious here, its over, its on  diminishing fumes, ITS  OVER,  and God help us, because the Western  character is a caricature of the people in  1932, who  brushed their teeth  with  pine tar.

    Thats about all one needs to  know, that white thing dead ahead is an  iceberg, and it peels down  your substandard compromised  side rivets, the watertight doors were ignored, the ocean  cascaded into  the great ship, compartment by compartment,  and the enterprise disappeared under the waves. Apres ca la deluge... literally. Cheerz  bitchez.

denny69's picture

Remember: No one at Morgan or Goldman says anything which doesn't benefit the company. One only needs to discover the how of the statements, predictions, assessments, etc. to determine where to either put your money in or take your money out. It's gotten to the point with these shills when they sometimes have two different employees making contrary suggestions that one will have to do more diligent investigating. My humble observation, unless you can afford to gamble, is to avoid them completely.

theTribster's picture

Aren't Spain's banks levered up 70-100:1 in the domestic housing market? You don't have to be a genius to figure out that in a rapidly declining housing market the Spanish banks are completely destitute. The market has declined somewhere around 45% in the last 3 years and that, as many suggest, is only half way to the bottom!

Given the size of the Spanish banks they alone could represent enough debt to bring down the Euro zone couldn't they? The same is true in the other Euro countries, maybe not housing but still huge leverage placed against terrible, losing bets. Bankers apparently make terrible gamblers.

When you consider the level of financial integration globally and the size of Europes failed banking sector, risk transmission becomes pretty clear right? I'm still amazed that we've started to define everything in terms of Trillions, that alone is scary because the number is effectively infinite - especially when there is ANY interest associated with it, the compounding variety is especially nasty. The scale of things is just ridiculous and difficult to conceive. Since scale matters in everything else in terms of how you deal with something, isn't it likely that since we've NEVER been here before that we have NO idea what to expect and or how to deal with these problems?

Eurozone, Japan, and the USA will all see their worlds crumble and dissolve in the coming years, mostly through war and financial chaos but when its all said and done most of the global wealth that's left will be in the hands of the East and the 1% from the West (migrating east). The wealth will move up and out.

The last step will be converting all of the retirement accounts to bonds, in the US that's like 55 Trillion dollars! All of that will go to wars and bankers leaving the people as destitute and broke as their Governments. This is only if we don't stand up and fight, we'll all get the opportunity this summer when things reach the boiling point here in America. Its obviously already started in Europe and there is no telling what Japan will do when they can't get foreign financing at rates less then 1%! The whole world is on the edge of a razor blade and its starting to rain harder and harder....