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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falak pema's picture

ot : Now how's this for a future US trend?


The FBI Announces Gangs Have Infiltrated Every Branch Of The Military

Read more:

mjb99na's picture

Gotta pull out before you blow your load, BITCHEZ!

rocker's picture

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

flacon's picture

"If only we had an alien threat from outside our world - we would all be united." ~ Ronald Reagan & Paul "the-reincarnation-of-Keynes" Krugman





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.


Quaderratic Probing's picture

They do need big raises and bonuses or we could lose these top quality people

HungrySeagull's picture

Fuck these top quality people.


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

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?

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.

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:

bruinjoe93's picture

They aren't crusaders of Christ.

buyingsterling's picture

'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)

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.

css1971's picture

Terr'rists everywhere!!!!!

Tompooz's picture

The FBI Announces Gangs Have Infiltrated Every Branch Of The Military


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

jaffa's picture

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.
car insurance quotes texas

cossack55's picture

"I recommend you panic"

               Hugh Hendry

Mactheknife's picture

"A foolish faith in authority is the worst enemy of truth."

                                              Albert Einstein

maxw3st's picture

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.

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.  

circusoflife's picture

how are u able to put images in your comment? Im dumb. I cant figure it out

williambanzai7's picture

You can't unless you have contributor permissions.

Everyman's picture

Special People Suck.  <sarcasm off>

circusoflife's picture

thxs for the reply...but that's lame! WAHHHH!  WAHHH!

OldTrooper's picture

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.

circusoflife's picture

why can't u just let me whine & cry! heh?  :-)

I am more equal than others's picture

Please don't let it be the pizza's Domino because Godfather's sucks.

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

tickhound's picture



3) The designed controlled demolition remains on schedule

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. 


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...

circusoflife's picture

Your graphics are too complicated.


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



JohnF's picture

I've stolen that phrase for my next presentation...

deliciousirony's picture

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.

Temporalist's picture

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.

OutLookingIn's picture


Total Global Debt Jubilee.


Total Global War.

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.

OutLookingIn's picture

I hope and pray that you are wrong.

Cooler heads must prevail.


We can kiss our asses goodbye!

margaris's picture

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


FeralSerf's picture

You could have short, very expensive world wars instead.   They don't care if the proles don't get to eat.

deliciousirony's picture

plus they can make a nice buck off a big war.