As Europe prepares to set off on a historic, if very divisive round of Treaty changes in an attempt to set the framework to be followed by all countries in advance of the controversial European federalist experiment and even more divisive issuance of "stability" bonds, we thought we would once again remind readers just what the very simple math behind the entire spectacle is, which Europe tries so hard to ignore with each passing day. Because at the end of the day it is a very simple tension: there is massive demand for fresh cash in the form of 1.7 EUR trillion in maturing debt (ignoring interest payments). Of this Morgan Stanley says, "Policy makers and investors have consistently underestimated the bank funding roll as a transmission mechanism of sovereign fears into the banks and real economy." This is 100% correct: courtesy of 30 years of great moderation everyone assumed that the funding markets would operate for ever and that interim rollovers would never be an issues. Incidentally this is precisely what we warned about back in April 2010 when we said that "Unless the UST can roll its debt not on a monthly but now weekly basis in greater and greater amounts, the interest rate doesn't matter." As it turns out, we were 100% right on the core problem, but 100% wrong on the location - the rollover funding crunch is not in the US, it is in Europe. And this is precisely what Europe is now fighting each and every day with, coming up with crazier and crazier plans to mask the fact that no matter what, there simply is not enough cash. Because while the first chart shows cash demand needs, the second one shows that when it comes to cash 'supply', or said otherwise issuance of unsecured debt, the market is now completely and totally dead. Indeed, November issuance is just laughable as the red-boxed region so vividly demonstrates. And that, in two charts is that - everything else is hype, rhetoric, smoke and mirrors.
Chart 1 - European funding needs:
Chart 2: European debt issuance - even as soaring debt and interest rollover and redemption demands mean huge amounts of debt have to be raised, what is happening is the following: "Term bank funding issuance has dried up. We are concerned there has been a step change in the availability and pricing of senior unsecured funding given such elevated euro-zone uncertainty and the knock-on to assets supported by unsecured funding." In other words: the is no more debt available which is "guaranteed" simply by promises of future cash flow: investors demand asset collateralization for the simple reason that fewer and fewer believe that assets are able to generate the amount of cash represented by a conflicted underwriter syndicate. Unfortunately, there is nowhere near enough hard assets to fund secured assets at even modest LTVs, and it will only get worse and worse as less and less cash actually goes to regenerating a rapidly depreciating and amortizing asset base.