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Guest Post: The European Financial Crisis In One Graphic: The Dominoes Of Debt

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

The European Financial Crisis in One Graphic: The Dominoes of Debt

The dominoes of debt are toppling in Europe, and there is no way to stop the forces of financial gravity.

After 19 months of denial, propaganda and phony fixes, the political and finance leaders of the European Union are claiming a "comprehensive solution" will be presented by Wednesday, October 26-- or maybe by the G20 meeting on November 3, or maybe on Christmas, when Santa Claus delivers the gift global markets are demanding: a "solution" that actually pencils out and that forces monumental writeoffs of debt and thus equally monumental losses on European banks and bondholders.

There have been any number of insightful descriptions of what's going on beneath the artifice, spin and lies, for example:

Four Facts that PROVE the EFSF (rescue fund) Doesn’t Matter At All (Zero Hedge)

Revised Troika Forecast Sees Total Greek Debt-To-GDP Peaking At 186%: Here Is What Happens Next (Zero Hedge)

There Is No Bailout Spoon: The Math Behind The €2 Trillion EFSF Reveals A "Pea Shooter" Not A "Bazooka" (Zero Hedge)

Citi Expects A 76% Haircut On Greek Debt (Zero Hedge)

EU Bank Stress Test: When No. 1 Financial-Strength Ranking Spells Doom (Bloomberg)

I have summarized the fundamentals in this one graphic: the European dominoes of debt. Simply put, there is no way the EU authorities can stop the first domino--Greek default or equivalent writedown of its impossible debt load--from toppling the over-leveraged banks which will be rendered insolvent when forced to recognize their losses.



That leaves each nation with the politically unsavory option of bailing out its premier banks with taxpayer money, and squeezing the money out of its citizenry via higher taxes and austerity. That assumption of bank debt will in turn trigger downgrades of heavily indebted sovereign nations such as France, moves that will raise rates and make the bailout even more costly to taxpayers, who will also be suffering from reductions of income due to global recession.

Once the banks and bondholders accept a 50%-75% writedown in Greek debt, then the other debtor nations will be justified in demanding the same writedown in their crushing debts. This dynamic leads to estimates that 3 trillion euros will be needed to bail all the players out. Alternatively, total losses will equal 3 trillion euros, wiping out banks and bondholders of sovereign debt.

The German economy is simply not big enough to fund a 3 trillion-euro bailout. Germany has 81 million people and its GDP is $3.3 trillion; the EU GDP is roughly $16 trillion. Compare those with the U.S., with 315 million people and a GDP of around $14.6 trillion.

As an act of self-preservation, Germany will be forced to either exit the euro outright or cloak its withdrawal with a "euro 1 and euro 2" scheme, a scenario I first laid out in March 2010: Why the Euro Might Devolve into Euro1 and Euro2 (March 2, 2010). (Other recent entries on the end-state of the European debt crisis:)
The Eurozone's Three Fatal Flaws (September 21, 2011)
The Dynamics of Doom: Why the Eurozone Fix Will Fail (July 25, 2011)
Why The European Union Is Doomed (March 28, 2011)

In any event, the last domino, the artifice of a single currency, will fall one way or another.

It's important to understand that the supposedly "prudent" economies of France, Germany, South Korea and Canada are just as heavily indebted as the U.S. or "drowning in debt" nations such as Italy. In the long view, is Germany's load of 284% of GDP really that different from Italy's 313%? Yes, the mix of debt is different, but the point is that all of Europe, and indeed the developed world, is overloaded with debt: state, bank and private.

The idea that leveraging more debt can resolve this gargantuan over-indebtedness is beyond absurd. (Source: BusinessWeek)

It has recently come to light that in the worst-case scenario (i.e. reality), "solving" Greece's debt crisis would absorb the entire EFSF Rescue Fund's 400 billion euros. By all accounts, every estimate of Greek tax revenue is overstated, and every estimate of its expenses understated; Greek GDP is collapsing. In all probability, the reality is worse than anyone is willing to confess, which means this chart is already outdated and hopelessly rosy:



Way back in August, the euro was reckoned to be 20% above fair value of 1.15 to the U.S. dollar; once the dominoes start toppling in earnest, what will the euro's fair value be? Parity, or perhaps even lower? Why hold euros when the end-game is already visible?



He/she who gets out first gets out best.


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Sun, 10/23/2011 - 13:28 | Link to Comment falak pema
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ot : Now how's this for a future US trend?


The FBI Announces Gangs Have Infiltrated Every Branch Of The Military

Read more:

Sun, 10/23/2011 - 13:33 | Link to Comment mjb99na
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Gotta pull out before you blow your load, BITCHEZ!

Sun, 10/23/2011 - 13:42 | Link to Comment Smithovsky
Smithovsky's picture

Cue R.E.M.

Sun, 10/23/2011 - 13:49 | Link to Comment Everyman
Everyman's picture

But I feel fine!

Sun, 10/23/2011 - 14:47 | Link to Comment rocker
rocker's picture

"It's the End of the (financial) World as we know it."   But I feel fine.   Got PMs?

Sun, 10/23/2011 - 14:54 | Link to Comment Mr. White
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"Everybody Hurts" ??

Sun, 10/23/2011 - 15:21 | Link to Comment flacon
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"If only we had an alien threat from outside our world - we would all be united." ~ Ronald Reagan & Paul "the-reincarnation-of-Keynes" Krugman





Sun, 10/23/2011 - 16:30 | Link to Comment Careless Whisper
Careless Whisper's picture

dominlo #2; bailout is DOA politically

i got news for you =======>   they. don't. care.

the central bankers will do whatever it takes to save the shareholders (tbtf) of the banking cartel.


Sun, 10/23/2011 - 19:02 | Link to Comment Quaderratic Probing
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They do need big raises and bonuses or we could lose these top quality people

Mon, 10/24/2011 - 00:26 | Link to Comment HungrySeagull
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Fuck these top quality people.


Look down here in the field. There be plenty of good men.

Sun, 10/23/2011 - 13:48 | Link to Comment Piranhanoia
Piranhanoia's picture

Not in the Air Force. They have a highly tuned group of jesus crusaders ready to kill the world because ol' jeez says its okay.

Wonder what is worse?

Sun, 10/23/2011 - 14:56 | Link to Comment TruthHunter
TruthHunter's picture

I think I'm reading Animal Farm

Pigs? People? Gangs? jesus Crusaders? Banksters?


They all look the same to a lesser farm animal  like me.

Sun, 10/23/2011 - 17:16 | Link to Comment Dapper Dan
Dapper Dan's picture

Fair is Fair on Oct 22, 8:54 AM said:

More importantly this is no different than:

-Goldman Sach's Gang infiltrating & corrupting the Treasury & Fed Reserve
-Xe (aka - Blackwater) infiltrating & corrupting top levels of military decision making
- Koch Brothers & other Oil interests infiltrating & corrupting the EPA enforcement system
- Top Lobbyist & political party big wigs/rackeeters infiltrating & corrupting the Supreme Courts decision making to allow rampant corporatism.

Sorry, but the street gangs in the military likely damages is small peanuts compared to what the other criminal cartesl have done.

Read more:

Mon, 10/24/2011 - 02:43 | Link to Comment DavidAKZ
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Sun, 10/23/2011 - 16:18 | Link to Comment bruinjoe93
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They aren't crusaders of Christ.

Sun, 10/23/2011 - 16:42 | Link to Comment buyingsterling
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'ol jeez says it's OK'

Yeah, it's ol jeez's influence on the world that's running it into the ground. Nice sarc, (or nice retardation, can't tell which)

Sun, 10/23/2011 - 13:54 | Link to Comment OutLookingIn
OutLookingIn's picture


Just like the good old bad days.

When there was an evil no goodnik communist behind every tree!

Cue: George and the House Committee on Un-American Activities.

Sun, 10/23/2011 - 14:13 | Link to Comment css1971
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Terr'rists everywhere!!!!!

Sun, 10/23/2011 - 18:03 | Link to Comment Tompooz
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The FBI Announces Gangs Have Infiltrated Every Branch Of The Military


Oh.Bummer, sure you want to bring the boyz home?

Mon, 04/30/2012 - 01:11 | Link to Comment jaffa
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The FBI's main goal is to protect and defend the United States, to uphold and enforce the criminal laws of the United States, and to provide leadership and criminal justice services to federal, state, municipal, and international agencies and partners. Thanks.
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Sun, 10/23/2011 - 13:32 | Link to Comment cossack55
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"I recommend you panic"

               Hugh Hendry

Sun, 10/23/2011 - 14:56 | Link to Comment Mactheknife
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"A foolish faith in authority is the worst enemy of truth."

                                              Albert Einstein

Sun, 10/23/2011 - 13:32 | Link to Comment maxw3st
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The game may continue as the can continues to get kicked down the road, but the last chart above contains an unavoidable and fundamental illustration of why the current EURUSD rally can be shorted to ultimate profits.

Sun, 10/23/2011 - 14:33 | Link to Comment Smithovsky
Smithovsky's picture

In a sane world that would be 100% true.  Unfortunately that word doesn't apply to most people in a seat of power on this planet.  Either US will print to bail Europe out and EURUSD will be at 1.8 in a year or two, or Europe will change law and will print.  I think the latter is less likely but not out of the question.  What's another 3T when your GDP is 16 (sarcasm, if not obvious).  And a bit of inflation is a bit easier to sell to the people at home than a total financial collapse.  Don't think we'll fall apart just yet, Germany knows it's much better off with EU intact and they'll bite the bullet and kick the can down the road for a few more years.  Not sure which effect will be greater in the eurusd in Europe-prints case, dilution or risk-on.  I agree with the above article about what should happen but shorting is just too obvious and the market doesn't do obvious, at least not until it extracts as much blood as possible.  

Sun, 10/23/2011 - 13:33 | Link to Comment bugs_
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paris troika

Sun, 10/23/2011 - 13:33 | Link to Comment williambanzai7
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Sun, 10/23/2011 - 13:42 | Link to Comment circusoflife
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how are u able to put images in your comment? Im dumb. I cant figure it out

Sun, 10/23/2011 - 13:46 | Link to Comment williambanzai7
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You can't unless you have contributor permissions.

Sun, 10/23/2011 - 13:50 | Link to Comment Everyman
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Special People Suck.  <sarcasm off>

Sun, 10/23/2011 - 14:34 | Link to Comment circusoflife
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thxs for the reply...but that's lame! WAHHHH!  WAHHH!

Sun, 10/23/2011 - 16:25 | Link to Comment OldTrooper
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Maybe it isn't quite as lame as it would be if anyone off the street could post photos.  If I wanted crass ads, bad jokes and porn I'd turn on prime-time tv.

Sun, 10/23/2011 - 19:17 | Link to Comment circusoflife
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why can't u just let me whine & cry! heh?  :-)

Sun, 10/23/2011 - 13:50 | Link to Comment buzzsaw99
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i've never seen so many apostrophes wasted so badly (2:50)

Sun, 10/23/2011 - 14:36 | Link to Comment I am more equal...
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Please don't let it be the pizza's Domino because Godfather's sucks.

Sun, 10/23/2011 - 13:35 | Link to Comment Corn1945
Corn1945's picture

The debt is unpayable.

The fact this farce has gone on so long tells me:

1) Most "market participants" are unable to do simple math in an Excel Spreadsheet


2) There really are no "market participants" except trading computers who feed headlines into an algorithm

Sun, 10/23/2011 - 13:48 | Link to Comment tickhound
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3) The designed controlled demolition remains on schedule

Sun, 10/23/2011 - 13:36 | Link to Comment Belarus
Belarus's picture

EUR at 1.43-1.5 will make  a fine short against the possibiltiy of lower PM and stock prices. Until then, expect a massive ramp, nut job. 


Sun, 10/23/2011 - 14:05 | Link to Comment gun4A
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dream on

Sun, 10/23/2011 - 13:36 | Link to Comment Hiwatt
Hiwatt's picture

Europe's got no external imbalances, is rich and can afford to keep delaying solving its internal problems indefinitely. All this domino and doom talk is entertaining but in the end it's just plain cr*p...

Sun, 10/23/2011 - 13:41 | Link to Comment circusoflife
circusoflife's picture

Your graphics are too complicated.


Hey...who knows what happened after the -- BAY of PIIGS?



Mon, 10/24/2011 - 09:58 | Link to Comment JohnF
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I've stolen that phrase for my next presentation...

Sun, 10/23/2011 - 13:41 | Link to Comment deliciousirony
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When I see both Zerohedge and Krugman in agreement that the EU is f**cked beyond repair, I know it's going to be bad.


See his "Deck chairs/Titanic" post for some more hilarity.

Sun, 10/23/2011 - 14:37 | Link to Comment Temporalist
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But Krugman is just happy because it's distracting from the U.S. problems.  If it's not the Euro it's aliens to him.

Sun, 10/23/2011 - 13:43 | Link to Comment OutLookingIn
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Total Global Debt Jubilee.


Total Global War.

Sun, 10/23/2011 - 13:44 | Link to Comment Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Being slightly cynical, the morons who put us into this mess will never admit they were wrong, thus war it shall be.

Sun, 10/23/2011 - 13:47 | Link to Comment OutLookingIn
OutLookingIn's picture

I hope and pray that you are wrong.

Cooler heads must prevail.


We can kiss our asses goodbye!

Sun, 10/23/2011 - 18:52 | Link to Comment margaris
margaris's picture

I hope the world has a giant energy crysis sooner than later... you cant have long world wars without cheap energy.


Sun, 10/23/2011 - 20:04 | Link to Comment FeralSerf
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You could have short, very expensive world wars instead.   They don't care if the proles don't get to eat.

Sun, 10/23/2011 - 18:30 | Link to Comment deliciousirony
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plus they can make a nice buck off a big war.

Sun, 10/23/2011 - 13:43 | Link to Comment Vampyroteuthis ...
Vampyroteuthis infernalis's picture

This charade has been going of for a couple of years now. You do have to admire how the ECB has been baffling the world with BS. What will force their hands is when all available capital is utilized to keep the debt Ponzi running and the real economy collapses. Reality is a bitch.

Sun, 10/23/2011 - 13:52 | Link to Comment bigwavedave
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To whom is all this debt owed? China? Saudi Arabia? The 1%? 


Fuck'em! Time to default.  

Sun, 10/23/2011 - 13:52 | Link to Comment bigwavedave
bigwavedave's picture

To whom is all this debt owed? China? Saudi Arabia? The 1%? 


Fuck'em! Time to default.  

Sun, 10/23/2011 - 14:50 | Link to Comment rocker
rocker's picture

 I think we are at a point of not "If".  But "When"

Sun, 10/23/2011 - 13:54 | Link to Comment theone
theone's picture

just kick the can further down the road and send the world stocks to new highs





Sun, 10/23/2011 - 13:57 | Link to Comment TradingJoe
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Well guess it's about THAT TIME, CLIFF DIVING TIME I mean!!!

Sun, 10/23/2011 - 13:59 | Link to Comment FinHits
FinHits's picture

Can I question the first domino "Greece" fall impact to second one (Eurobanks) just for a second. I suspect it is all bankster bullshit to say it will impact Eurobanks massively.

Cue copy paste from my previous post. Could somebody critially shoot it to pieces, please!



Well, if they contain this to Greece (admittably difficult, but can happen), then the write-off levels from Eurobanks are tiny, a few tens of billions of Euros, about one-third of which has approximately been written off already without any meaningful impact on Tier 1 ratios.

I would expect the 50-60% Greek PSI to maybe hit the worst impacted bank by clearly less than 1% of Tier 1 capital. Doesn't hurt much, and the vulnerable banks are above 9% in most cases. So national recapitalisation need is limited from Greece only. Then there is maybe € 70 billion other kind of recap need just to get the Spanish and Italian banks to base Tier 1 of 9%, but that can wait a few months longer than Greek writeoff impact.

Then of course the "firewall" leaks to other PIIGS, but in my opinion they should just tough it out and say that that is the blueprint for them if they want writeoff: hard default, CDS event and IMF-drip feed. Nobody wants that, so they will at least try.

EDIT: Greek banks can't survive 50-60% PSI, but they are zombies anyway. Maybe they will just run with negative equity.

The key part is just shut up after the above and say that there won't be any new iterations, unless a nation wants to draw EFSF, triggering IMF involvement on the side.


Remember the "Greece can't default since it would be Lehman II all over again" is just (French) bank bullshit propaganda, not reality. That bullshit bluff is just now being revealed another "too big to fail"-lie to get free taxpayer money.


Sun, 10/23/2011 - 17:00 | Link to Comment FinHits
FinHits's picture

No takers? Am I right?

Sun, 10/23/2011 - 20:12 | Link to Comment FeralSerf
FeralSerf's picture

Never let a crisis go to waste.  And don't tell the truth about the crisis either.  It's more profitable to get the sheep to run to the other side of the corral where the wolf is and sell some derivatives on the possible outcomes of which the dealers already know the likely outcomes.

Sun, 10/23/2011 - 14:09 | Link to Comment sabra1
sabra1's picture

                                                                                   up! all is well!


as long as canadian real estate keeps going up,  up,

Sun, 10/23/2011 - 14:09 | Link to Comment Alex Kintner
Alex Kintner's picture

"As you know, you Default with the Debt you have, not the Debt you might want or wish to have at a later time."

Sun, 10/23/2011 - 14:30 | Link to Comment Dr. Hannibal Lecter
Dr. Hannibal Lecter's picture

Very nice.  Can we get this done by Wednesday?  

Sun, 10/23/2011 - 14:32 | Link to Comment Motley Fool
Motley Fool's picture

Hmm sadly this analysis is a bit simplistic. It ignores a few things, such as the effect this would have on banks in the usa, and on other countries and on gold, each of which will in turn affect the others.


It's one giant 3D domino clusterfuck.

Sun, 10/23/2011 - 14:37 | Link to Comment Bollixed
Bollixed's picture

Time for "The Geithner Effect" and Benny and the boys to kick in another 16 Trillion.

They've done it once, why is it hard to believe they won't use the same rationale to put boot to can this time?


Sun, 10/23/2011 - 14:46 | Link to Comment Temporalist
Temporalist's picture



Greece just call up the Fed.  What is $1 Trillion when Ben Bernanke can solve everything in 15 minutes with his digital Epson like he dished out $15T before?

Sun, 10/23/2011 - 14:48 | Link to Comment BandGap
BandGap's picture

After Greece falls there is no reason for any other event to be sequential.  Many things will happen simultaneously.  Chaos is the more like scenario.

Sun, 10/23/2011 - 14:57 | Link to Comment I am Jobe
I am Jobe's picture

Buy a Ticket! (With Reference to the Strauss Brothers, Ambassador Mike Moore, Kenneth Arrow, Financial Sharpies, Martin Luther King Jr. and Gov. Dewey)
Remarks before the Dallas Friday Group
Dallas, Texas
October 21, 2011

Sun, 10/23/2011 - 15:14 | Link to Comment blunderdog
blunderdog's picture

Well, guess that means the USA sorta has nothing to worry about...

I always thought it would most likely come to something like this: "the rest" of the civilized (heh) world implodes into dust and when all the bankers get together to decide what to do, the USD is still floating on top of the financial shitstorm.

So we FINALLY get a chance to setup Bretton-Woods II.  Naturally there'll have to be concessions, because America never experienced the kind of debt collapse that's tearing the Eurozone to pieces.

Heh.  (again)

Sun, 10/23/2011 - 15:17 | Link to Comment SilverDoctors
SilverDoctors's picture

time to que the bank runs?

Sun, 10/23/2011 - 15:33 | Link to Comment navy62802
navy62802's picture

I think armed conflict fits somewhere in this picture.

Sun, 10/23/2011 - 15:44 | Link to Comment newbee
newbee's picture

Being one of the 99%, and way below the "out of money" 1% line, I've decided to do my best to profit from the ensuing end of the world just like the TBTF crowd.  Here's my offer to the betterment of man kind:

I'm selling squares at $5 a pop for those who want to place their bets when exactly the world ends!  Precise date and time required.  I'll split the pot with the winner; well, I understand that's tough to do once the world actually ENDS, but those are just more picky little details.  PM's will allow a 10% discount on square price!  Get 'em quick while they're available!!!!  Contact "" to place bets!

If this goes over well, I'll be expanding this little endeavor to include other key events such as:

  • Next date OBL is killed
  • Bernak is fired
  • Obummer's impeached
  • OWS shuts down the FED
  • WW III begins
  • Others as appropriate

DISCLAIMER:  winnings may or may not be "shared" depending on circumstances beyond / caused by Newbee's control.


Sun, 10/23/2011 - 22:56 | Link to Comment honestann
honestann's picture

Sadly, I'm sure lots of people would place their bets, but only when you provide a specific, objective, unfudgable definition of exactly what will constitute "the world end" when it happens.  Good luck providing that.

Sun, 10/23/2011 - 16:28 | Link to Comment ivars
ivars's picture

This was a productive weekend!

I think I finally managed to match them!

Now I have a really superb forecasting /history study interest tool . Have a look at exercise behind matching GREAT DEPRESSION and GREAT RECESSION timelines for the first time ( once  I managed to patternalize ( ?) OUT FED's grip on USA stock market prices)  and, as usual, better visibility charts plus explanations here:

And here:

The supplement chart for rereading the history of GREAT DEPRESSION and rethinking the future as time line can be extended as well:

Sun, 10/23/2011 - 17:48 | Link to Comment bernorange
bernorange's picture

Dominos?  How about a nice game of global thermonuclear war?

Sun, 10/23/2011 - 19:57 | Link to Comment devo
devo's picture

Are we ready to admit this is a ponzi scheme yet? It was a good run.

Mon, 10/24/2011 - 02:28 | Link to Comment Peter K
Peter K's picture

Why hold Euros?. Because the Big Panda can't get enought of that superlicioss Erurbamboo.

But in reality, China is betting that a few million EUR/USD can save 1/3 of their currency reserves (3.2tUSD of which 37% is in Euro). Oh, and I almost forgot, they are scared of the USD hegemony, and whatever:) Talk of throwing good money after bad....... 

Mon, 10/24/2011 - 08:21 | Link to Comment luigi
luigi's picture

Ehm... what about killing the creditors? ;o)

Thu, 03/29/2012 - 02:35 | Link to Comment jaffa
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Ownership of a share gives the shareholder certain contractual rights and powers, which typically include the right to receive declared dividends and to vote the proxy on important matters. The owners of both bonds and stock, may be institutional investors financial institutions such as investment banks and pension funds or private individuals, called private investors or retail investors. Thanks.
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Mon, 04/16/2012 - 01:46 | Link to Comment jaffa
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The syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum. Thanks.
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