'Til Debt Did Europe Part

Tyler Durden's picture


'All is not resolved' is how Morgan Stanley's Arnaud Mares begins his latest diatribe on the debacle that is occurring in Europe. While a disorderly default seems to have been avoided (for now), the Greek problem (as we have discussed extensively) remains in play as debt sustainability seems questionable at best, economic recovery a remote hope, and the growing political tensions across Europe (and its people) grow wider. Critically, Mares addresses the seeming complacency towards a Greek exit from the euro area noting that it is no small matter and has dramatic consequences (specifically a la Lehman, the unintended consequences could be catastrophic). Greece (or another nation) leaving the Euro invites concerns over the fungibility of bank deposits across weak and strong nations and with doubt over the Euro, the EU could collapse as free-trade broke down. The key is that, just as in the US downgrade case last year, a Euro-exit implies the impossible is possible and the impact of such an event is much, much higher than most seem to realize. While the likelihood of a Greek euro-exit may remain low (for now), the scale of the impact makes this highly material and suggests the EU will do whatever it takes (print?) to hold the status quo.


Morgan Stanley: Til Debt Us Do Part

Of the importance of unintended consequences.

Our colleague Joachim Fels once described the current stage of the crisis in Europe with the acronym CCC, standing for a crisis of confidence, competency and credibility. One could add a fourth ‘C’ to this list, for consequences. A recurrent feature of the global crisis is the unintended consequences of policy actions. Perhaps the two most important milestones of the past four years were policy decisions, whose unanticipated consequences caused in each case a considerable degradation of the situation and extended the crisis both in scope and length.  


The first of these events was the decision by US authorities to let Lehman Brothers fail in September 2008, now widely acknowledged to have been a major policy error.


The second was the decision by European governments to initiate restructuring of public debt in Greece without having first put in place a robust safety net for solvent governments. This is also now widely regarded as a policy error. In each case, we note that many in the market initially applauded these decisions (when not actively calling for them beforehand) without seemingly fully appreciating the consequences.


Why would a Greek exit from the euro area be so damaging?

The euro is irreversible. Is it? The starting point of the analysis is the simple yet immensely important observation that if Greece were to leave the euro, this would imply that the euro is reversible.

Breaking down the fungibility of money. If the euro is reversible, it is not reversible in only one country. It is reversible in all. If Greece can leave the euro, then other countries may also leave the euro at a subsequent date. The implication is what we describe as a breakdown in the fungibility of money.

To explain this point, one must consider that in a fiat money system, money is the liability of a bank. It is the liability of the central bank in the case of central money, i.e., banknotes and bank reserves held at the central bank. It is the liability of commercial banks for commercial money, i.e., deposits.

As long as the euro and the Eurosystem exist in an irreversible form, these different forms of money are effectively fungible. Should the euro be reversible, however, these different forms of money are no longer completely fungible.

Federal money versus national money. Which is which? The euro may be a federal currency, but a deposit in a bank is effectively national money. If a country were to leave the euro, it would most likely be redenominated in that country’s new currency.


Strong money versus weak money. Which is which? As long as the euro is irrevocable, the distinction made above between federal and national money is irrelevant. By contrast, if the euro were to become reversible, this distinction matters. A euro held in a country more likely to abandon the euro becomes a weaker form of money than a euro held in a country more likely to keep it, with banknotes the strongest form of money.


How a run on money would unfold. In a situation where different forms of money are no longer entirely fungible, what one ought to expect is a run away from the weaker forms of money towards the stronger forms.


The erosion of deposits in Greece and Ireland provides but a glimpse of what would happen elsewhere if Greece exited the euro.

Contagion ought to be a familiar pattern by now. To illustrate this point, it suffices to recall that the failure of Lehman Brothers closed access to capital market and interbank funding to all banks, regardless of whether they were solvent or not. Similarly, the initiation of PSI for euro area sovereigns caused contagion not just to Ireland and Portugal but also to Spain, Italy, Cyprus, etc., and eventually France and Austria, regardless of whether the governments of these countries were objectively solvent or not.


No line of defence? The precedent of deposit haemorrhage in Greece and Ireland is nonetheless relevant in that it highlights the tools necessary to counter a bank run.

In a situation of a bank run, what prevents catastrophic outcomes (widespread bank failure) is the ability and willingness of the central bank to replace deposits and fund banks directly itself. This is what happened in Greece and Ireland, where the Eurosystem increased its lending to domestic banks.

Limits to the ability of the Eurosystem to intervene... The Eurosystem is however constitutionally constrained to only lending to banks against ‘adequate’ collateral.

and perhaps limits to its willingness. More fundamentally, if the euro were to become reversible, the nature of the risk taken by the central bank by replacing deposits would change substantially.



And the credit crunch would likely come back. Arguably, the points we have listed here are of secondary importance. More important is the fact that if banks lost their deposits, they are very unlikely to extend credit to the economy.


Conclusion: if one country goes, it is monetary union that goes.

Our conclusion at this stage is that Greece leaving the euro would not be a local event. It would change the nature of money everywhere across the euro area by making the euro reversible. It would turn most of money supply (commercial money) back into national money. It would hinder the ability (and possibly willingness) of the Eurosystem to act as a lender of last resort for the entire euro area banking system. For all practical purposes, it would be the end of the euro as a genuine single currency. It would also likely trigger an unstoppable run on banks, which would push large parts of the continent onto a depressionary and politically painful path.

To preserve the euro if Greece left would require total federalism in the rest of the area.

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Wed, 02/22/2012 - 15:46 | 2185977 Offtheradar
Offtheradar's picture

When will we reach critical mass with all this debt?  WHEN is the word, not if..   I'm betting 2017. 


Wed, 02/22/2012 - 15:51 | 2186014 Deadpool
Deadpool's picture

5 years?? we crossed 100% GDP last week. it will be 5 months.

Wed, 02/22/2012 - 15:56 | 2186033 Hard1
Hard1's picture

The mayans knew!!!  I used to think that they just ran out of temple space to write dates and that people are very superstitious.  Now I think they knew all along.

Wed, 02/22/2012 - 16:12 | 2186118 knightowl77
knightowl77's picture

Months is more likely than years....I would rather get off this roller coaster sooner rather than later....

Wed, 02/22/2012 - 16:21 | 2186146 Offtheradar
Offtheradar's picture

No way it's just months.  "May you live in interesting times."  - I'll take boring instead.

Wed, 02/22/2012 - 16:21 | 2186148 American34
American34's picture

That Mayan date is irrelevant and ridiculous. Your confusing Correlation and Causation.

Wed, 02/22/2012 - 15:51 | 2186016 Chump
Chump's picture

No way we get to 2017.

But then again, I've been wrong over and over and over as CBs keep managing to kick this can, so what the hell do I know?

Wed, 02/22/2012 - 16:07 | 2186094 Offtheradar
Offtheradar's picture

It always goes on for longer than you think it can.

Wed, 02/22/2012 - 16:08 | 2186095 Hippocratic Oaf
Hippocratic Oaf's picture

You know nothing, chump

Wed, 02/22/2012 - 15:51 | 2186019 knukles
knukles's picture

Have they scheduled the Day of Reckoning yet?

Wed, 02/22/2012 - 15:56 | 2186036 john39
john39's picture

sure, but no announcement on the date to the masses.  its for internal consumption only.

Wed, 02/22/2012 - 16:02 | 2186067 knukles
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In another co-incidence, right after I applied for a job with the SEC all my ads on ZH are for Filipino tranny porn and dating services. 

Wed, 02/22/2012 - 17:30 | 2186421 Non Passaran
Non Passaran's picture

That sounds much more interesting than ads I'm seeing, perhaps I should do the same...

Wed, 02/22/2012 - 16:05 | 2186090 battle axe
battle axe's picture

Greece Defaults in 3 months, that and Iran and watch the fireworks..

Wed, 02/22/2012 - 16:24 | 2186157 FlyoverCountryS...
FlyoverCountrySchmuck's picture

As long as it comes AFTER November 6, 2012, no one in the World Banker/Filthy Rich Elite/Socialist/Big Media circles cares.

All that matters is delaying ANY signs of economic Distress until then.

Wed, 02/22/2012 - 15:46 | 2185987 GeneMarchbanks
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'Conclusion: if one country goes, it is monetary union that goes.'

'Critically, Mares addresses the seeming complacency towards a Greek exit from the euro area noting that it is no small matter and has dramatic consequences (specifically a la Lehman, the unintended consequences could be catastrophic).'

Analysis? Or scaremongering so that MS doesn't get exposed as part of the global banking conspiracy cabal?

Wed, 02/22/2012 - 15:57 | 2186043 Manthong
Manthong's picture

"scaremongering so that MS doesn't get exposed"

Correct from at least two perspectives.

Wed, 02/22/2012 - 19:25 | 2186930 jose.six.pack
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'drachmatic consequences'

Wed, 02/22/2012 - 15:49 | 2185989 Mercury
Mercury's picture

In terms of federal governence and the sovereignty of it's member states, Europe is now where the United States was in the 1860's.

But on which side of the Civil War is not evident just yet.

Wed, 02/22/2012 - 16:26 | 2186162 citta vritti
citta vritti's picture

a little like the old Roach Motel - roaches check in but they can't check out. Ah, fetteral systems.

Wed, 02/22/2012 - 16:35 | 2186191 NotApplicable
NotApplicable's picture

Lincoln proved conclusively that unions are insoluble, once you destroy all opposition to them.

Wed, 02/22/2012 - 15:49 | 2185993 John Wilmot
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"To preserve the euro if Greece left would require total federalism in the rest of the area."

Uhh, what do you think is the purpose of this entire EU exercise? Answer: total federalism. I personally doubt Greece will leave, it would require that they form a non-collaborator government, but either way, Greece in or Greece out, this is heading toward a United States of Europe. Has been since 1914.

Wed, 02/22/2012 - 21:20 | 2187355 Curtis LeMay
Curtis LeMay's picture


That delusion, and rightly so, is over with.

Wed, 02/22/2012 - 15:49 | 2185995 Deadpool
Deadpool's picture

...did war breakout today? gold and oil sure did...

Wed, 02/22/2012 - 15:57 | 2186042 john39
john39's picture

either something happened already, or, more likely, insiders are getting the jump on things...

Wed, 02/22/2012 - 16:00 | 2186065 Deadpool
Deadpool's picture

see my comments below. new era starts now.

Wed, 02/22/2012 - 15:49 | 2185998 besnook
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if one country goes the entire western fiat money system goes including the usa after a momentary spike in dollar strength.  isn't it ironic that the country whose history serves as the mythological(pun intended) cradle of western civilization should be the country responsible for the takedown of the mutated organism from it's legacy oozing diseased pus over the world.

Wed, 02/22/2012 - 15:49 | 2186000 Kreditanstalt
Kreditanstalt's picture

The Eurocrat leadership is betting DESPERATELY on real economic growth, both to prevent civil disorder and to enable them to in effect devalue and pay off their debts.

It won't happen with oil prices over $100. 

"Buy" gold now.

Wed, 02/22/2012 - 16:39 | 2186205 NotApplicable
NotApplicable's picture

Too bad the "leaders" have no chips to bet with that weren't first given to them by the bankstercrats (as they are the ones profiting from the economic destruction and civil disorder).

Wed, 02/22/2012 - 15:50 | 2186003 adr
adr's picture

It is all ok. We live in upside down land. My favorite statistic is contracting at a slower rate than before is actually growth.

Or how about spending more, but not as much as you previously said, is cutting spending.

Or adding debt is actually increasing capital.

Or booking future sales as profit now is under GAAP rules.

Or selling 2% more than the previous month while still being down 20% year over year is a recovery???

Last month my house lost $10k in value but this month is only lost $8k. That means my house actually increased in value by $2k!!??!?

How anyone can actually spout this garbage with a straight face is beyond me. What makes me crazy is people actually buy it!!!

Wed, 02/22/2012 - 15:50 | 2186005 Deadpool
Deadpool's picture

...did war breakout today? gold and oil sure did...

Wed, 02/22/2012 - 15:53 | 2186006 Manthong
Manthong's picture

 "the decision by US authorities to let Lehman Brothers fail in September 2008, now widely acknowledged to have been a major policy error. "


The rescue of Goldman and AIG was the policy error.

But we will pay the price for not clearing the system then and all the QE malinvestment since then within the next couple of years.

Wed, 02/22/2012 - 15:59 | 2186057 Matt
Matt's picture

It's all a matter of perspective; letting Lehman Brothers fail was a major error, if your objective was to keep people from paying attention to what is going on, and keep the ponzi going.

Not letting businesses collapse when they fail, and bailing them out forever without taking any action to reduce risks is the major error, if you wanted to allow for a properly functioning market.

Wed, 02/22/2012 - 16:03 | 2186078 GeneMarchbanks
GeneMarchbanks's picture

Actually it has gotten much worse. More concentration of risk, more fragility and less transparency.

Fat tails cometh. Conflagration cometh. Atonement cometh.

Wed, 02/22/2012 - 16:29 | 2186173 FlyoverCountryS...
FlyoverCountrySchmuck's picture

It was a POLITICAL ERROR, not a policy one. The error came in not allowing the markets to fall and recover naturally. We'd already be out of this by now. Instead, the pain will be magnified times 100.

Wed, 02/22/2012 - 15:59 | 2186046 falak pema
falak pema's picture

we are heading there : total  federalism; but it will take a lot of pain to accept it... 20 years, if we are lucky. The world will change fast now...and nobody knows how the cookie will crumble. 

Nation states have a thousand year history written in blood; unwinding that is something that takes decades even centuries. 

The European continent is centerpiece now to regress or progress. But the downturn will be ominous first. 

Wed, 02/22/2012 - 15:58 | 2186051 chockl
chockl's picture

To the Greeks  ....Do Not Pay.

Wed, 02/22/2012 - 15:59 | 2186058 oogs66
oogs66's picture

What are the unintended consequences of avoiding a Lehman moment? Might be worse than those f having a Lehman moment

Wed, 02/22/2012 - 16:00 | 2186060 Deadpool
Deadpool's picture

I knew by getting gold to close below 1750 on option expiration Friday that time was near for an explosive move. Today's the day. Holiday weekend +1. The cartel may have printed their last tape. ahhh, free markets again. Happy Gen. Washington's birthday gift to us all!

Wed, 02/22/2012 - 16:41 | 2186212 NotApplicable
NotApplicable's picture

Until the Crimex is gone the tape-painting will continue.

Wed, 02/22/2012 - 16:00 | 2186062 adr
adr's picture

Why was letting Lehman fail an error? How so? It was an error becuase it brought to light how overleveraged the financial scam was. 

It was an error because it caused the stock market to collapse? It was bad policy for the stock market to go down?

I get it, anything that causes investors to lose money or for a large corporation to fail is bad policy. You can't let Greece fail because it is bad policy for any investor in equities to lose money if bondholders lose money. If you own Apple shares your holdings should not decline in value because of some stupid unimportant country like Greece.

Failure is not an option. Equities should never decline in value, that just ain't kosher.

Wed, 02/22/2012 - 16:22 | 2186149 Sandmann
Sandmann's picture

It was an Error because Lehman operated out of LONDON and that is where irs global trades were handled - and it had NO CASH to pay bills or to meet counterparties' demands.  It is a little fact of life that Big Dick Swingers in New York might get to be Treasury Secretary, but if they don't understand what goes on in London or Tokyo they tend to look really stupid when it all implodes.

Just how dumb do you have to be to run Goldman Sachs ? Have any of these guys getting to be Capo in this Mafia organisation ever worked outside the Big Sandpit in the USA ?

Wed, 02/22/2012 - 16:01 | 2186068 SgtShaftoe
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There's a project that needs your help, KG-1984 An encryption tool for liberty focused peaceful resistance groups:  https://launchpad.net/kg1984

Wed, 02/22/2012 - 16:04 | 2186076 ISEEIT
ISEEIT's picture

The goal is to keep it together until early 2013. If it spins out of control before that marshal law will be declared, suspending elections. The plan is to knock the legs out from under it all after obama has secured his (their) second term. However in either case, obama's mandate will be secure...Destruction of the United States and the U.S. dollar. The globalist have determined that the time to act is now.


Wed, 02/22/2012 - 16:19 | 2186137 Sandmann
Sandmann's picture

marshal law  - try Martial Law, and it is not possible.  You are living History - the milestones towards revolution. You ignore them in learning history to focus on the screscendo - so watch the milestones as they pass because when the turmoil comes you will forget how you got there. In the meantime read Dmitry Orlov "Reinventing Collapse"

Wed, 02/22/2012 - 16:22 | 2186087 resurger
resurger's picture


Goldman Hedge Fund Chief Retires.


There is something wrong there


Wed, 02/22/2012 - 16:51 | 2186253 LowProfile
LowProfile's picture

"Wietschner, 44, joined New York-based Goldman Sachs in 1994 in the firm’s convertible sales group after working for three years at law firm Weil Gotshal & Manges LLP (1127L), according to the memo."

Well, there's part of it.  The only logical reason to hire a lawyer for that position is to circumvent the law.

But I think you were driving at something more?

Wed, 02/22/2012 - 16:10 | 2186109 Shleprock
Shleprock's picture

Can I get some QE or a bailout, I just want to fill my tank???

Wed, 02/22/2012 - 16:14 | 2186125 Sandmann
Sandmann's picture

Greece needs a Currency Reform as in Germany in 1949 and France very often. A New Currency at a 10:1 exchange rate backed by the 111 tonnes of Gold in the Central Bank and a total moratorium on External Debt repayment.

That is the only solution. Otherwise Greeks should charter buses and have the population move to Austria and Germany and look for work or build Favellas

Wed, 02/22/2012 - 16:16 | 2186128 Olympia
Olympia's picture

Global Debt Crisis

The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy "illness" threaten Democracy and the freedom of people?

By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total ...understand where this plan started just to bring all states at the same end ...understand how this type of plans are established...


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