Yesterday we pointed to the fundamental reason for Europe's angst [5] - that of dramatic imbalance across nations finances. Today we look at the implications of the growing concerns at sustainability of the Euro-area itself. Deposits are fleeing the PIIGS at ever faster rates, growth remains a dream as PMIs for most of the PIIGS trend towards (or are at) record lows, and despite all the liquidity provision of the two LTROs, credit extension to the real economy dropped once again. The Greek PSI remains front-and-center from a headline perspective but yesterday's dismal Euro macro data combined with the reality of these three factors appears to be increasingly repriced into sovereign credit spreads as CDS drag manipulated bonds wider in the last week.
1. Deposit growth (or losses) remain a huge problem and as Arnaud Mares of Morgan Stanley noted, the fungibility of money across time deposits in European nations is increasingly questioned as Europe is far from a union...
[6]
2. PMIs for the PIIGS are low (and lowest in some cases) and given austerity budgets there seems little hope for improvement anytime soon...
[7]
3. Credit Creation is still dropping as loans to non-financials from MFIs dropped even after the two LTROs - providing little hope for organic growth...
[8]
And with Spain openly dismissing the new fiscal compact's deficit targets, we suspect this vicious circle is far from over.
Charts: BARCAP