The Truth Behind Europe's (€1.7 Trillion) "Triangle Of Terror"

Tyler Durden's picture

It's time to forget about Europe's headlines for 15 minutes and refresh what is really going on in Europe, and why European leaders are scrambling day to day to come up with a solution to what is ultimately an intractable problem. Technically, the problem, as explained below, is manifested in three distinct symptoms, which exist in a self-referencing feedback loop that amplifies good input signals when times are good (and incremental debt is ample) and vice versa, or become a toxic spiral where one problem is amplified in the other two, when the system is caught in a deflationary spiral, until the entire system is threatened by collapse. The three "problems" are summarized best in a chart by Morgan Stanley's Huw Van Steenis (see below) in what we have dubbed the "Triangle of Terror" - these are i) Bank Solvency, ii) Sovereign Stress, and iii) Bank Funding Stress. At the end of September, Europe found itself in a perfect storm, in which concerns about all three hit peak levels. Since then, fears have subsided somewhat, following ECB intervention and rumors of bank recaps, not to mention an attempt to control sovereign "solvency" via a naked CDS ban, yet the festering question of overall Sovereign Stress remains. And what is worse, in a replica of a game of financial "communicating vessels", any time there is an improvement in one or two, it is the third that gets beaten down. This explains why while banks have seen a boost in confidence expressed by rising stock prices, now that Europe is addressing Bank Solvency and Bank Funding Stress via actions of the ECB and the EFSF (the fact that the EFSF is even needed, when the Fed could address both issues at the same time, shows how woefully incapable the ECB is to deal alone with Europe's problems), sovereign spreads have exploded, and OAT-Bund spreads hit all time wides overnight.

All that said, the core problem at the very heart of European instability, is nothing more than, you guessed it, excess debt, €1.7 trillion worth of it to be precise: this is how much debt has to be rolled over the next 3 years, and also explains the magical €2 trillion number needed for the EFSF as only something that big can i) backstop the debt roll and ii) insure the needed bank recap, which in reality needs more like €400 billion but that is the topic of a different post. And without the abovementioned support pillars of bank solvency, funding and sovereign stress being address and fixed, in a credible manner and at the same time, this debt will not be able to roll, and effectively lead to systemic European insolvency. And that, in a nutshell, is what the issues facing Europe are. Everything else is headlines, smoke and mirrors.

First, presenting the "Triangle of Terror." As Van Steenis opines, "Intensity of Policy Response to Address the 3 Interconnected Issues – Stress in Sovereign Funding, Bank Funding, and Bank Solvency – Has Stepped Up, But Much Still to Be Done"

Here is how Europe's has address the Bank Recap problem for the time being, and which banks will see major dilution as a result of incremental capital infusion:

In addition, the ECB has done all it could to address the Bank Funding issues: "To Address the Stress in Bank Funding, ECB Has Undertaken 6 Initiatives in Recent Months. We Think More Needs to Be Done to Support Term Funding." However, as we report every day, this has so far failed - liquidity conditions in Europe are once again as bad as they were in mid September and deteriorating rapidly.

Yet the most disturbing chart is the following, showing how much debt Europe has to roll in the next 3 year: "Policy Makers and Investors Have Consistently Underestimated the Bank Funding Roll as a Transmission Mechanism of Sovereign Fears Into the Banks and Real Economy – €1.7 Trillion of Term Debt to Roll"

As a reminder, this is debt that has to be roll. This does not include the trillions in incremental debt that has to be issued at both the corporate and the sovereign level to preserve "growth", because as every Fed president knows, one can only have growth in the modern ponzi, Keynesian system, when one has incremental debt. In other words, forget growth for the sake of this analysis. Europe has its hands more than full with simply preserving its current status quo in the face of an ongoing deleveraging tsunami. Which is why any indication that it will fail in addressing all three of the core issues at the same time in a way that the market deems credible (we can't underling this enough), namely Europe bank solvency, and funding, and sovereign stress, will result in another major risk off move, now that the market is convinced that all three can be resolved simply with words, hope and a telegraphed desire to fix problems. They can't.

This explains why so much rests on Europe, and why as we explained previously when we actually did the math, Europe will, whether it is at Summit 1, 2, 3 or 123, disappoint massively as what is going on is nothing more or less than a simple regression to the mean. And, as hard as they try, Central Banks while being very powerful entities, can not overturn the simplest rules of nature.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
jarboejl's picture

Hey I drew that first graph (something close to it anyway) on my whiteboard and showed it to my friend who's a Financial Advisor.  He didn't get it...

spiral_eyes's picture

The real problem is an interconnected system based on debt-derived currency where a small amount of deflation, a few bank failures, or a small sovereign failure can all lead to collapse.

A system vulnerable to small parts of it collapsing will ultimately be destroyed by collapse.

jdelano's picture

Thank you.  How can so many intelligent people choose to ignore this knowing that the short term gain of doing so will lead to long term...apocalypse?

Unprepared's picture

1.7 Trillion is a drop in the bucket in the global Overnight repo market. They would have no problem rolling it over.


LawsofPhysics's picture

The same way the have for the last 100 years.  Hedge accordingly.

mac768's picture

the laws of physics are obviously overturned if one looks at the Euro making 200+ pips in less than 48 hours?

maybe they have used CERN to reverse the laws of Newton

Ahmeexnal's picture

France about to demand Germany to pay up compensation for all past offences.

tiger7905's picture

Some great analysis from Stratfor on the European mess...

buzzsaw99's picture

As long as the billionaires prosper everything will be fine.

Quixotic_Not's picture

True, and as long as the billionaires are protected by the USofA, nothing will change...

buzzsaw99's picture

the poor must become poorer, the rich must become richer. that is the order of things.

Quixotic_Not's picture

As long as AMERICANS consent to it, you are correct...

Keep voting for the (D) & (R) Free Crap Empire™, keep helping the billionaires.

Withdrawn Sanction's picture

"As long as AMERICANS consent to it..."

Correct. And correct, that the D vs R (or right vs left) is an illusion. Meet the new boss, same as the old boss.

Stop only encourages them. Withdraw your Sanction. They need your consent. Dont give it to them. Your voluntary consent salves a guilty conscience...and yes, some do feel guilt...properly so. Your consent also legitimates the outcome. Dont give it to them.

What if they held an election and no one showed up? But but that'd leave the process open to the special pleaders, the charlatans, and the looters....yes, and? That's exactly different from the present situation how? For chrissake, stop voting.

LawsofPhysics's picture

Likewise, stop paying taxes, close all bank accounts and change all fiat in physical money.  Let me know when everyone starts doing this.


In additional the Americans, you might want to add the Chinese to people being "forced" to consent, of course they come to America and consent anyway.

Alvaro de Esteban's picture

And that is the reality.

I know some wealthy families in Spain & Italy that is documented that they were rich 2.000 years ago during the times of the Roman Empire, and no war, empire falling, plague, natural catastrophe, revolution or economic disater have changed that 

Unprepared's picture

Those SOB won't stop until sovereign risk = 99% of total risk and all asset beta's ~ 1.

Welcome to risk commoditization, bitcheeez

"You can't run, you can't hide

No surprise, close your eyes

Come with me"

Randall Cabot's picture

"There is nothing in this earnings season so far that supports a U.S. recession " said Michael Murphy, managing partner at hedge fund Rosecliff Capital. "Although the European headlines are making for a wild ride, lets remember the market is cyclical and this European financial crisis will pass. We are a lot closer to the end than we are to the beginning."


Quintus's picture

I pity the fool who has money under management with these clowns.

CharlieSDT's picture

I can't believe how retarded that CNBC article is.  "Nothing to see here, folks.  Earnings beat by a couple cents, never mind the collapse of the banking system of 1/3rd of the world, or the unemployment, housing crash, or trillion dollar college debt bubble here.  But my Fifth Third Bank stock will se us all through that."

jdelano's picture

You saw that too?  I was tempted to bomb his email--"Michael, your sorry book is never coming back no matter how much time you spend desperately trying to pimp on CNBC, and when Europe unravels and the tsunami of redemptions start pouring in, I hope you end up on the street, shoulder to shoulder with the OWS hippies you are no doubt mocking and cursing at this very moment, as someone as criminally stupid as you definitely should not be among the top 1%."


I'm in a shitty mood today.  

Mark123's picture

Like driving while looking in your rear-view mirror to see how well you are doing....


Got to keep in mind, he may have a teeny weenie conflict of interest in his assessment.  Gotta keep those commissions rolling in!


TooBearish's picture

THis is bullshite - fuzzy math - 2X3 = 5 dammit!

YesWeKahn's picture

This is completely solvable issue with the printing press. At some point, only inflation and how people deal with it matters. The politicians only care about being reelected, they could care less about inflation.

disabledvet's picture

The fundamental problem is who gets killed. That's all this is. That's why we look past the meetings. Failure is the option.

Triggernometry's picture

Triangle? More like dodecahedron...

eBuddha's picture

in times of trouble, the Godfather would opine that it was 'time to go to the mattresses'

today, we should all be preparing to 'go to the wheelbarrows' - the Germans will know what i mean.


earnulf's picture

One very slo-mo eurorail wreck happening.   This train left the track years ago and is still hurtling along towards the immovable object that is backstopping the crowds watching this in real time

Ray745's picture

That chart about debt rolls looks completely wrong, according to Bloomberg, Italy has 297.635 billion EUR of maturities in 2012, where do they get 100 billion?

Tyler Durden's picture

Potentially just financial debt. Here is Buiter's summary of sovereign debt issuance by country by year. So yes, add the two series and you get a number over €4 trillion, which is about what Daiwa estimated some time ago.

tahoebumsmith's picture

Will this weekend's meeting be just a bunch of Bankrupt Nations talking about how much more they can bankrupt themselves or just another bunch of Bankrupt Banks finding more ways to bury themselves deeper? Or are the meetings this weekend actually just another party celebrating the 3 Trillion dollars this global criminal syndicate has stolen from the serfs since the last celebration?

LookingWithAmazement's picture

They will fix it next Wednesday. Boring world we live in.

jdelano's picture

On sunday they will say they will fix it wednesday.  On wednesday they will say they fixed it, with details to follow by G20.  

bnbdnb's picture

I wish I was a EU banker, knowing I had the EFSF backing me up....I'd make the worst possible bets I could.

monopoly's picture

It is time to get Physical all. Go for it. lol

Shizzmoney's picture

I look at those graphs, and think of only ONE word: "Clusterfuck"

Mark123's picture

"This does not include the trillions in incremental debt that has to be issued at both the corporate and the sovereign level to preserve "growth", because as every Fed president knows, one can only have growth in the modern ponzi, Keynesian system, when one has incremental debt."

This is the big problem....the exponential debt-fueled growth feedback loop/prosperity forever formula is breaking down.  Only way out is to crash the current system and start again (hard work), hyperinflation (destroys the system anyways), or war (destroys the system too).


Pick your poison.

LawsofPhysics's picture

Yep, pick your poison indeed.  No one bothered to explain an how an exponential equation really works to them. All that remains in question is the timeline.  Going on several hundred years now.

Kurion's picture

Listen carefully, think about what you do because if I Go...
We all Go.
What's for supper?

JustObserving's picture

All the currencies in this world are in trouble as fiat currencies meet unsustainable debts and even more unsustainable pension and social obligations such as Medicare (unfunded liability $80.5 trillion).  There has to be massive printing by all concerned.  England is already printing 75 billion pounds.  This is a perfect environment for gold and silver to skyrocket.  But, instead, they wallow like fat pigs stuck in mud.  Can someone explain?  

oddjob's picture

Why wait until the music stops to grab a chair?

Zero Debt's picture

The correlation with money supply is likely intact but gold in the short-term was way overextended.

If you care about the gold price on anything less than a yearly basis you must use technical indicators like trend lines, supports, resistance, SMAs, changes in open interest, market volume, backwardation, premiums, production, central bank action, sentiment etc. and critically, know when to short. Gold near 2000 before year-end 2011 is a safer short than long trade.

Also an increase in the money supply can be used to dilute paper gold as cheap credit at 0% rate can be used to cover losses indefinitely on short positions. Due to the nature of the futures market what can actually happen in a disaster scenario is that the price falls while there is no physical settlement available, only cash settlement. This is a valid concern, refer to metal depository levels and movements.

John_Coltrane's picture

When big losers like John Paulson (and other hedgies who bet heavily on banks) need to liquidate to meet redemption, margin calls etc. what do they sell to raise cash, BAC at $6 (which they bought at $12) or GLD at $1600 (which they bought at ~$1000)?   You guessed it, and it really drives prices down.  (Its always supply/damand for stocks, bonds etc)  This is exactly what happened in the last 2008 crash with everything (APPL, GLD etc).

kaiten's picture

You dont need to bailout both, banks and sovereigns. Either you bailout countries and then banks are OK, or you write down the debt and then you need to bail out the banks. So your triangle is an illusion.

StychoKiller's picture

Come to grips with this illusion:  Currency is small, colored pieces of paper.