He Who Deleverages Best: Presenting The 'Credit Intensity' Of Europe's GDP Growth

Tyler Durden's picture

There exist those pathological Economics 101 acolytes who say that no matter what happens in the global economy, since it is all supposedly a closed system, whether one incurs leverage at the sovereign or private-sector level is largely irrelevant, and that is all translates into economic growth as long as the system is experincing a net leverage increase. Usually these same acolytes come up with economic theories which attempt to validate and justify infinite sovereign debt incurrence, usually to explain why socialism can be funded (if only in various formerly capitalist societies). At the heart of their thinking is the Kalecki profits equation which says that:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends


Or in other words, as long as the non-government sector is expanding its savings (reducing leverage), aggregate economic output remains the same as long as the government is doing the opposite. Of course, as we explained before this equality breaks immediately in a real world in which one evaluates the impact of asset age, amortization, depreciation and otherwise the impact of reality on profitability. But does that mean that every economics theory that says corporate deleveraging is offset by sovereign leverage is wrong? Not necessarily. it just says that there is far more to the final outcome than what an Neo-Keynesian Econ 101 textbook alleges.

To evaluate the impact of private sector deleveraging on economic growth/GDP in the context of a rapidly releveraging sovereign, we present the following analysis from Citi which observes various European countries and analyzes the "credit intensity" of GDP growth, or in other words which country has preserved, or even grown its GDP even as its private sector has seen substantial deleveraging. The results are interesting and may present a framework for evaluation the winners and losers in Europe in the era of "great sovereign leveraging", permitting a reverse engineering of the success stories, and applying their lessons to the losers.

Citi has compiled data analyzing private sector leverage and cross referenced it to countries who have seen massive sovereign debt expansion in the past 5 years, however offset with various degrees of private sector deleveraging. The results are as follows :

Given the persistent tensions from the financial sphere and the precarious situation of some banking systems, it is interesting to compare how much leverage has been accumulated in the last ten years in various euro area member states and how much economic activity was generated during the same period (see Figure 4). This allows us to measure the ‘credit-intensity’ of GDP growth. In particular, we concentrate on the last five years to see whether the relationships have evolved.

In peripheral countries such as Spain, the last two years (Q4 2009 to Q4 2011) saw a 16-point drop in the real credit outstanding without triggering a contraction in the level of economic activity. Over the same period, Ireland was perhaps the most successful peripheral country, with real credit outstanding shrinking by 57 points while the real GDP level rose by 4 points. In Portugal, while the reduction in real credit outstanding was more limited, worth 12 points in the last two year, the level of real GDP still declined, albeit by a modest 2 points. Italy is the only country within the peripheral group that experienced an increase in the amount of private sector real credit outstanding, with a gain of 5 points. Yet, the corresponding increase in real GDP was limited to just 2 points.


Core and soft core countries recorded GDP gains, with Finland (7pt) and Germany (6pt) clearly in the lead, compared to Austria (5pt), Belgium (4pt) and France (3pt). Interestingly, Belgium managed to grow its GDP despite experiencing a clear deleveraging phase. Note that Germany is the only euro area member state to have recorded an increase in its GDP level since 2002 while its level of private sector credit outstanding has declined during the last decade .

So while the occasional success story may exist, the danger is as always one of extrapolating into the future too far, especially a future in which private sector growth will very likely be even more constrained in the coming years. The danger is that expanding sovereign leverage will no longer be private sector offset, which it obviously is not in the general case, and will simply become a headwind to growth, at both the macro as well as micro levels.

Looking ahead to the next few quarters, there is a clear risk that banks operating in peripheral countries will either maintain tight lending standards or restrict lending even more in the event of further increases in the proportion of non-performing loans. Unless those countries implement sufficiently comprehensive structural reforms to lift potential growth, economic activity is at risk of contracting further in the coming quarters, increasing investors concerns about debt sustainability.

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Pretorian's picture

Bernanke put is about to be tested and it will not stand a minute. Europe debt  explosion underway countdown is on;euro at 1.21 to at least parity.

CrazyCooter's picture

Well, at least pairity will help their exports ... <checks notes> .... hmmm, all they export is socialism ... which begs the question ... if socialism was 20% cheaper, would people buy more of it?



magpie's picture

At least one European export has been the hit in the USA.

disabledvet's picture

not necessarily. A credit collapse "begs" the question "what is the export and from whom and from whence do i export?" The power of lending is VASTLY understated on this site...if acknowledged at all. "Gold money does not launch rockets." Indeed risk taking at that level requires POOLS of money so large that it almost commands "drives for equity." (at the level of an Incorporation this is called "profits.") From whence comes these pools of capital in the EZ? they are trying to set up Governmental institutions (FDIC, Eurobonds, Euro Fed) but the problem is that "they don't have a Wall Street." ("A seemingly endless stream of liquidity capable of financing pretty much anything.") This is not an INSTITUTIONAL problem but an HISTORICAL one. "Confidence" (in the form of a risk/reward relationship) can only be obtained "with time." One TRANSACTION at a time i might add (TRUST.) Hence RELATIONSHIPS (it has been many years since my Mandarin days but the word is "weltichuang" or thereabouts comes to mind) are what matters. "Social pools of money" as it were that give "confidence" real meaning in form of ACTUAL money...and a favorable result by it (product received in good order. look forward to doing business with you again.) The biggest expressions of this are ironically enuf publicly traded companies called "the Nasdaq" and "the NYSE." "Europe in the form of the euro" in a nutshell simply lacks this. And the evidence is overwhelming: "they would prefer to have the return of their capital in dollar denominated assets." To argue against this is to argue against the market...slap the salami down if you've got a problem with it but when Airbus builds a plant in Alabama it's hard to argue "with the result" whether you agree or disagree "with the sausage making."

Doña K's picture

The bottom line is that agri-land and PM's are the great equalizers

Peter Pan's picture

I hate to dsappoint the author of this piece but the example of Spain hasn't turned out too well.

disabledvet's picture

I'm no expert but from reading the (ableit brief) wiki history of Valencia that I posted..."as with China there is no such thing as Spain, either." These "regions" strike me as VERY powerful indeed. Is Europe prepared to go for this guy?
Perhaps if they added "cool euro-music" for their Lincoln Moment that would help?

GoldbugVariation's picture

How does this kind of ethereal economic hand-wavey talk help anyone make real decisions, esp. trading decisions?

apberusdisvet's picture

The author is relying on the numbers as provided by the countries involved.  Unfortunately, bankers and politicians, and the bureaucrats they control have been known to (horrors) lie and obfuscate.  I suspect that in these troubling times, the incentives to do so are even greater.

Vegetius's picture

Once more its good to see the bailed out bankers explaining economics to the Plebians. Good to see that - 

1 Bankers have no shame

2 Bankers don't understand Irony ( Well I suppose they don't get economics either)

Still living in fantasy land banker boys - Alas, regardless of their doom, the little victims play! No sense have they of ills to come, nor care beyond today.

“A fool's paradise is a wise man's hell.” - Thomas Fuller

THE DORK OF CORK's picture

Ireland is not a good example as GDP is distorted by Multinational activity which is not taxed very highly withen that juristiction.

GNP is a much better indicator.

Also given the rise in population, GNP per head is a even better indicator of what is going on in this sewer.

the lastest National accounts for GNP per head (current) display 28,325 for Y2011

This from a high of 37,384 per head in Y2007.

However I have my doubts about the GNP per head  methodolgy in the national accounts.
If you simply divide the census 2011 figures into GNP (current) for 2011 you get
27,725 Euros per head for Year 2011.


Southern Ireland population
Y2002 :3,917,203
Y2007 :4,239,848
Y2011 :4,581,269

Ireland is a small very very open economy...(a colony)

The debt never dies if it is not defaulted on.....

We simply export our goods / wealth ( symbolic debt) elsewhere by reducing our standard of living - the people buying our goods increase their wealth (debt) when they buy our goods.

There can be no deleveraging in this debt based system.

Grand Supercycle's picture

As mentioned before, market intervention has only postponed the inevitable.

Despite short and medium term market vacillation - the following remains a constant :

>> USDX monthly indicators [ie big picture] continue to warn of significant long term USD upside. (thus EURUSD & AUDUSD etc bearish)

>> SPX monthly indicators [ie big picture] continue to warn of significant long term downside for equities which will be worse than 2008.


disabledvet's picture

and from whence comes this "long term uptrend in the dollar"? the USA is in the midst of the biggest deleveraging cycle since the Great Depression. The dollar has BOTTOMED...but the only talk on The Street is demands for more QE and Senator Schumer "blaming the Fed for all that they were suppose to do but didn't." Dollar positive? hahahahaha! (How about support for the actual owners of Single Family Housing? Or should we just be grateful that the tax increase is a "mere" 70 percent "in the name of the Uber-State" of course. Don't worry...the last of the actual 500 taxpayers left up here have got ya' covered!) Sure...we're pumping tax revenues in the form of oil...IN NORTH DAKOTA. "Don't want that in California"? I have no problem with that either. "They can keep there 25 billion barrels." In ALASKA. "Phuck Airbus"? Hey, "Sweet Home Alabama...it's all yours." Can't stand Saturns "cuz they're made by folks in Tennesee!"? Apparently they have no problem putting the "volks" in Volkswagon either. All i'm trying to say is "who gives a phuck about equities up or down" let alone taxpayers at any level. Right up there with "national suicide" in my book. "Good for another thousand points on the upside." That's WITHOUT a banking system i might add. (and ad hominem attacks on the British Bankers Association. Who needs those clowns! "We're Congress!")