Presenting Europe's 'Over-Indebtedness' Roadmap To Catastrophe

Tyler Durden's picture

Europe faces three systemic risks: Sovereign (GRExit vs. GERxit), Liquidity (unsustainable refinance rates and foreign capital outflows), and Banking (insolvency and under-capitalization). All of these can fundamentally be traced back to an era of excessive over-indebtedness, which as Pictet notes, leads to required deflationary policy responses that are incompatible with developed market government targets (of re-election, Keynesian pro-growth fiscal policy, and satisfying financial market's expectations). While LTRO did indeed address liquidity risk in the very short-term, it is now painfully clear (just look at European bank stock prices) that financials are driven by sovereign risk (not so much liquidity risk) at the margin. The following three charts provide a roadmap to Nirvana or Samsara (hell). With the Summit underway, Pictet's path to catastrophe roadmap (tactical and strategic) is critical to comprehend.

It's not a liquidity problem, it's an insolvency problem...


In an over-indebtedness regime, Developed Market governments have three incompatible targets:


But decisions and policy actions are limited in capability as the Euro-Area roadmap to catastrophe remains clear (monetization, permanent transfers, or default/restructuring versus Greek insolvency, exit, and contagion)...


and the tactical and strategic scenarios and probabilities remain as binary as ever:


At this juncture, the EU authorities will have to decide whether to continue supporting Greece with more lending and postpone targets or whether to let Greece fall apart.

In order to keep Greece inside the euro area and prevent contagion from spreading, the EU will have to adopt some bold measures:

  • Increase transfers: ESM, eurobonds, EIB, Federal deposits guarantee, fiscal union, etc.
  • Debt monetisation: ECB’s own QE
  • Debt restructuring for overindebted countries
  • or a mix of the three options.

Unless it is addressing the backdrop issues (Great Divergence, lack of competitiveness), the euro area will not be able to survive in it current form over the longer term. The euro federalism, the only possible structural solution, will require an additional political commitment from all European countries. Even at this stage of the crisis, we do not perceive any early signs of such premises.


Source: Pictet

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Abraxas's picture

Cool charts! Nothing new, though.

NotApplicable's picture


I think you mean "Prosperity."

Sudden Debt's picture

Some persons debt is another ones income!
And you can never have enough income!

OttoMBMP's picture

"The euro federalism, the only possible structural solution"

Is there a law, that all banksters, even Swiss private banksters have to repeat the same BS without end?

"euro federalism" means to squeeze Northern countries and to gain a couple of months or years with rich bonuses for banksters.

WHo would run this central state? Rumpelpoy?! Soviet Union all over again?

Why don't Pictet move their HQ to Brussles?

Bunch of douche bags.

battle axe's picture

Road map to slavery.....

Anne Ominous's picture

It's a lick-squidity problem...

BLOTTO's picture

The end result is the same...





FAMILY (Gender)

 So that 'they' can replace it with...


They are manipulating and perverting everything good - to bad. Thats what EVIL does...this isnt about power hungry mofos - its WAY more sinister than that. It is that bad.

falak pema's picture

sounds like behind the pearly gates where there are none of the things you just listed; just eternal love!


old naughty's picture

something to look forward (eh, backward?) to.

Optimusprime's picture

The gnostic heresy pretends that what is heavenly can be made a stable human construct.  It's Joachim of Fiore all over again.

casey13's picture

No matter what most European countries will eventually at least partially default on the bonds. A 40% write down at minimum.

Japan and the US will follow.

timbo_em's picture

Are you Kyle Bass?

I think the key question is [START] either print and default later or default right away. Or continue with delay and pray till they reach the end of the road and then go back to [START].

NotApplicable's picture

What's that matter though when the same countries have to "recapitalize" their own private banks that bought all of the garbage?

Numbers kind of lose meaning in a ponzi like this. But it does keep the tree shaking exercise going for another day, as yesterday's marginal survivors become today's marginal road-kill.

localpacific's picture

good charts aboe eur/usd Market Overview by FXCC 

Cursive's picture

Of course sovereign risk is greater than liquidity risk if you can always manipulate your liquidity benchmark, i.e. 3-month LIBOR.  The question has always been solvency; if the decision is to prop the periphery up again, they will be back looking for more later.  For the nth time, you cannot solve debt problems with more debt.  You cannot solve debt problems with more debt, you cannot solve debt problems with more debt....


Mark123's picture

German economy is great, but most of their customers are equivilant to trailer park dwellers.  The mistake they made was to start goosing their economy by providing cheap vendor financing that will never be repaid.


Now what do they do?

NotApplicable's picture

Lie, deny, then lie some more. Kinda like Cisco's Mr. "Caaaaaaaash Chambers."

Anytime your core customers cannot afford your product, you're fucked, as you've failed to anticipate the lack of sustainable demand, instead pursuing the "Malinvestment Express."

Of course, in this New-Age of Central Banking, legitimate price discovery (the key to sustainable demand) has been rendered moot.

bigwavedave's picture

Not bad people to stash your money with. In CHF. Yanks need not apply of course. LOL

HaroldWang's picture

Well, it appears Europe isn't even concerned about Europe. Markets all up and everyone thinking some BS/kicking the can solution will come about at the summit. Amazing how this goes from disaster one day to REJOICE the next day.

slaughterer's picture

These last two days have traded like a slow-mo POMO ramp.  NYFED must be training the replacement for Brian Sack by taking him through everything really slow.  

Al Huxley's picture

Not to worry, because now with NIRP. all this debt will just gradually pay itself off.  Next stop, indentured servitude for bondholders, then first-born will have to be delivered to the banks as part of the conditions for owning bonds, but hey, at least the debt won't be an issue.  More actually better...

ATG's picture

Today may be when wheels finally come off central banker fiat cars and tracks: 2:32

Puts a bears' best friend in case of EZ global markets flash crash or war.

RichCash@RichCash8 Twitter 


Vince Clortho's picture

It is a bit distressing to see that many intelligent people are still trying to interpret and explain what is happening using economic models and statistics that are irrelevant at this point.

Al Huxley's picture

The more I think about it, the more I realize the genius that is NIRP.  Can't everybody see, with the quick tap of a - sign in front of the rate paid on bonds, the debt that was previously a governments liability becomes its asset?  They no longer want to reduce their debt, to pay it off, at -ve rates, they'll want to have AS MUCH FUCKING DEBT AS POSSIBLE.  More debt, more income.  Fucking geniuses, I can't believe it took them so long to get here.  But at least the debt crisis is finally solved.

elwu's picture

"It's not a liquidity problem, it's an insolvency problem..."

Indeed. This was obvious from the very beginning for everbody who wanted to see.

But the finance industry wanted for obvious reasons more liquidity, so the governments and the ECB were forced by this industry to provide liqudity.

While the real problem, the solvency issues, were largely ignored.

Except by the Germans who insisted from the beginning that there must be harsh structural changes (some call them wrongly 'austerity') in the GIPSIFs so they will one day reach a sustainable business models.

Of course, the GIPSIFs didn't restructure anything, so the problem was just increased by the liquidity measures.

TNTARG's picture

Elsa Fornero's words (Labor Ministry, Italy. A technocrat): "Work isn’t a right". Fuck the Constitutional rights (Art. 1 of Italian Constitution).

Which basically means: "Go fuck yourselves, you fucking italian citizens".

Nice. Let's go towards the United States of New Medieval Europe.

shovelhead's picture
Art. 1

Italy is a democratic republic, founded on work.

Sovereignty belongs to the people, which exercises it in the forms and within the limits of the Constitution.

I don't see any guarantees about work in there. Did you not get assigned to the mines at birth?

BlackholeDivestment's picture

...mapped out with the falling stars of masonic meat heads from the spirit Mars. 

TWSceptic's picture

Years of socialism mixed with left-wing liberalism, saw this coming 15 years ago. Chickens coming home to roost.


The French are actually stupid enough to think more of the same will solve their problems. The US will be next.

1Inthebeginning's picture

The process of unification has been going on since one celled organisms came together into multicelled organisms.  Given enough time and energy Europe will coalesce into one Federation eventually.  Indigenous people often resist change. 

If their is a financial collapse, then people will ask for whatever form of governance puts food on the table.  Hunger does amazing things to peoples minds.  The model for this is actually in the bible.  Remember: Egypt, years of super abundance, years of famine, those with the resources rose to power.  This is not a new process.   

The computer, genetics, and oil have put us at an inflection point.  One way to deal with this is to realize whats going on.  With all of these technological drivers crushing the world ever smaller,  the one path that is capable of saving the human race is a moral awakening of our responsibility of how we got here.  

shovelhead's picture

I ain't responsible for getting here.

It was the twinkle in my Daddy's eye.

That ol' rascal.

ghenny's picture

The US, Japan, China and Europe can and will (unlike our more responsible greatest generation parents) use the printing presses to kick all our economic problems down the road for at least a decade.  By that time all us baby boomers will be pretty much out of power, and sufficiently protected by government and private resources to live out the few short years we have left in relative comfort in a sea of suffering and poverty.  So forget about any resolution to anything right now or any terminal crisis.  It will happen after we are gone.  That is the tragedy for the younger generations.  They will have been robbed and left on their own by us to live in decades of poverty.  Nice epitaph for the worst generation in history.  I am ashamed about our behavior and that we went from being idealists to thieves.  But there you go.  If I were the kids I'd stage a revolution now and take away our ill gotten gains.  I recommend eunthanasia as the only sane policy for dealing with us.

shovelhead's picture

Another satisfied Hair-Shirt Club For Men customer.