Feb 152013
 February 15, 2013  Posted by at 8:15 pm Finance

Artwork: Ilargi for The Automatic Earth

This is a guest post by friend of TAE Dave Fairtex, who writes at Market Daily Briefing.



Dave Fairtex:

I've recently been exploring the statistical data warehouse provided by the ECB, and I was able to assemble the following chart, comprising MFI Loans (MFI = monetary financial institution) + Bonds (sovereign & corporate). It was good timing, because it shows that for the first time during this whole crisis, the eurozone has dropped into deflation.

Now don't get me wrong, if the Spanish banks (among others) had been marking their loans to market, deflation would have arrived long ago, but according to the data series provided by the ECB, Official Europe has now recognized that they are in deflation.

However you slice it, deflation is NOT a good sign for the equity markets. Fewer bank loans means less money to buy stuff. I'm … perhaps not calling a top (that was back in 2007) but I am leaning short here, at least in the eurozone and especially Spain. Fun exercise: the Spanish credit growth during the bubble years was a good 20% per year growth for 4 years. That's twice what the US did during that same period. If you look at Ireland, it's even worse.

Here are the charts.

First – the growth (year/over/year) in credit in the eurozone. When the line goes below zero, that says credit is contracting year-over-year.


Eurozone Credit Growth
spread chart

Next, the overall credit – bank loans and bonds. You can see bank loans have taken a bit of a spill recently.


Eurozone Total Credit
spread chart

The table below describes the state of credit among the countries of the eurozone. The columns marked with time periods (3M, 1Y, 3Y, etc) are the annualized credit growth (or decline) over that time period. The "State" column says a nation is in deflation if the 1Y annualized credit growth in credit is negative – the column marked 1Y.

Note that Greece has already gone through a default and thus their credit decline is quite dramatic. The 10Y column is the average credit growth over the past 10 years, which is meant to give a sense of what "normal" credit growth looks like, although one might argue that the last 10 years may have been a bubble period in many nations.

One really important note: the data is collected by the ECB, and records the values of the loans and bonds as reported by that nation's banking system. If the banks in that nation have not yet written down their bad loans it is almost guaranteed that there is a substantial amount of deflation yet to occur. If you examine Ireland, you will see that the banks there have written down a large amount of their nonperforming loan portfolios. This is not true for most of the other nations in the eurozone.


Nation Last Update TCMDO D/GDP 3M 1Y 3Y 10Y State Trend
Germany 2012-12-31 7,961 236 -15.1 -2.5 0.3 1.6 DEFLATION worse
France 2012-12-31 7,846 304 -4.5 0.7 4.2 4.8 near deflation worse
Belgium 2012-12-31 1,049 220 -17.5 -5.3 -0.1 3.2 DEFLATION worse
Netherlands 2012-12-31 3,156 410 -3.1 0.5 3.2 4.5 near deflation worse
Austria 2012-12-31 1,074 274 -9.7 -3.9 -0.4 4.2 DEFLATION worse
Finland 2012-12-31 517 209 -4.0 10.5 10.5 6.1 normal worse
Italy 2012-12-31 5,426 274 -5.2 0.6 1.8 4.3 near deflation worse
Spain 2012-12-31 3,936 294 -7.5 -2.5 0.4 6.4 DEFLATION worse
Ireland 2012-12-31 1,109 542 -19.5 -13.8 -8.6 7.6 DEFLATION worse
Greece 2012-12-31 451 177 -45.2 -52.9 -11.1 4.5 DEFLATION worse
Portugal 2012-12-31 607 288 -3.5 -4.3 0.9 4.4 DEFLATION worse


To be continued …


Home Forums Deflation Arrives In The Eurozone

This topic contains 0 replies, has 0 voices, and was last updated by  Raúl Ilargi Meijer 1 year, 2 months ago.

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February 14, 2013 at 9:00 pm #6925

Nicole Foss

Thanks for the charts, much appreciated.

Europe is indeed tipping over the edge again, into phase II of the credit crunch. For those minded to gamble with something they can afford to lose, shorting would be the way to go at this point IMO (bearing in mind that all gambling is risky, that governments can change the rules so that you may not be able collect on having been right, and that there will be far more ways to lose your shirt than to make a lot of money, even if you’re right about the trend).

The unnaturally low level of volatility, combined with strong insider selling against a backdrop of optimism verging on euphoria, is a strong red flag warning. deflation is a very powerful force, and can take hold very quickly. When it does it very rapidly becomes a self-fulfilling prophecy.

Watch Europe as it’s in the vanguard of deflation, and in some countries acute liquidity crunch already. This is where the rest of us are headed.

February 14, 2013 at 10:32 pm #6926


stoneleigh -

Well by now you know I love my charts. I’m happy to share. Discussions here have helped me greatly to refine the indicators I want to watch, and I’ve found that incredibly valuable.

I have learned through much experience (i.e. losses derived predominantly from my own stubbornness) not to trade based on my understanding of the macro situation – but only when the macro situation AND the price movements seem to align. That, keeping positions small enough for my own personal comfort level, and a stop placed so as to limit any potential losses just in case the trade goes against me – in case my timing is wrong. Which it is often enough to be annoying. I would encourage anyone else considering trading to do these three things.

But the trade is an afterthought. I felt this was a bit of a watershed moment, this move into actual deflation zone-wide as reported by ECB. If you look at Ireland’s MFI loan totals, and you see how much deleveraging their banks have done, and you look at Spain and see how relatively little they have done – well, it doesn’t bode well for Spain.

I remember when Ilargi said he felt the Spanish banks needed to write down some absurd amount (perhaps a trillion euro?) and I suggested that was too much. Now that I see the charts and what has happened in Ireland, I have to say he’s probably right. Perhaps not from a bad mortgage standpoint, but I’d bet there are a trillion overall in bad loans out there based on Spain’s MFI chart as well as that from Ireland. From the peak, a trillion euros gets Spain’s loan book back to about 2005.

And they have only written down a modest amount to date, perhaps 20%.

So either someone is gonna have to come up with 800 billion euros (!) to plug the hole or else…or else I dunno. The divergence clearly visible in the bond market – the rates Spain is paying – and the conditions appearing on the ground from a credit standpoint are really mind-boggling. As you say, when it snaps, it will be an impressive move.

My charts also let me monitor the eurozone credit spreads as well. That way I can continue to track the divergence – and I can also see the snap when it occurs.

February 15, 2013 at 1:37 am #6927

Raúl Ilargi Meijer

dave, did you get my mail?

February 15, 2013 at 5:24 am #6928



I put your link in a comment on FT.com – you may get some new visitors:


February 15, 2013 at 9:48 am #6929

Viscount St. Albans

Dave, This is a great resource. Thank you for sharing your data analysis. Does this data include credit from the shadow banking system (pension funds, insurance companies, sovereign wealth, and money market mutual funds)? I’ve read that shadow banking has grown to the point that it dwarfs traditional bank lending, but my understanding is qualitative. Making this our understanding of credit at least a bit more quantitative is greatly appreciated.

February 15, 2013 at 12:44 pm #6930


@ilargi – yes got your mail, just slow in responding because I was asleep! (I’m in the ICT timezone right now)

@nassim – Thanks you are very kind!

@viscount – I picked two timeseries from the SDW. Their names are horrid, probably concocted by some economist or software engineer (!), so I renamed them. What does BSI even mean?
* “MFI.Loans.Total” = BSI.M.U2.N.A.A20.A.1.U2.0000.Z01.E; MFI Balance Sheets/Assets/Loans [monthly, euro area, all, outstanding at end of period (stocks)]
* “Bonds.Total” = SEC.M.U2.1000.F33000.N.1.Z01.E.Z; Securities Issues/Debt Securities/Outstanding amounts [monthly, euro area, all issuers, all securities]

Note these two series are for the zone as a whole; these same series are available for each eurozone nation too, but change the “U2″ to the country designator: “DE” for Germany. My intent was to cast as wide a net as possible for all credit everywhere.

MFI.Loans.Total is intended to account for all loans to anyone by any MFI and are listed on the MFI’s balance sheet. Any institution that can create money is called an MFI.


MFI.Bonds.Total is intended to account for any debt security created by anyone anywhere in the eurozone, in any currency.

Here’s a link to SDW – the securities section so you can get a sense of the options: http://sdw.ecb.europa.eu/browse.do?node=17102

I’m still working on a way to describe my underlying data sources on my site in a concise yet transparent way, so if someone has a bone to pick with one of my charts, they can – and we can all get better data as a result. But it is a work in progress!

I’d appreciate any review you can give me. The goal is the truth!!

Hopefully someday it will set us all free.

February 15, 2013 at 8:15 pm #8399

Raúl Ilargi Meijer

Artwork: Ilargi for The Automatic Earth This is a guest post by friend of TAE Dave Fairtex, who writes at Market Daily Briefing.     Dave Fa
[See the full post at: Deflation Arrives In The Eurozone]

February 16, 2013 at 3:24 am #6933



Live in Germany for maximum irony.

February 16, 2013 at 11:22 pm #6936


So, who’s afraid of the big bad wolf?


February 17, 2013 at 1:13 am #6937


@Professorlocknload: Strangely, not a single instance of the word DEBT in the article. :lol:

February 17, 2013 at 10:25 am #6939



There is one instance of the word DEBT but it is hidden behind an abbreviation. D/GDP = “Debt/GDP”, Table, Header, column 4. Does that count?

It is interesting though. I mentioned credit a lot (lender/economic/systemic perspective) but not debt (borrower/individual perspective). I suppose that’s like talking about a fight where I discuss “punching”, but don’t focus so much on “getting hit.”

February 17, 2013 at 4:05 pm #6943

Alexander Ac

Strangely enough, almost no responses to this important event. Why?

Also I noticed Charles Hugh Smith (guest blogger at ZeroHedge) noticed this deflationary trend in Europe, though he used a slightly different tables from Dave, where no Europe wide deflation was obvious yet.

One comment on ZH noticed, that ECB could fight deflation with further lowering of bank reserves requirements, which are already rodiculously low… how will all this end?

Almost all of my friends in Slovakia are in debt (my sister too), and those who are not, are doing everything possible to get into debt – becouse everybody is entitled to have his/her own house in order to raise his/her own children.

Most. Tragic. Species. Ever.

February 17, 2013 at 7:08 pm #6944


Hi Dave,

Is that a head and shoulders forming in that EU Total credit chart?

Also, on Prof’s Zero Hedge link:


The deflation death spiral is a theoretical description of a situation but it does not describe the reality of human action, for any number of reasons:

1. There is in reality always a diversity of expectations among the public. While some people will expect prices to continue in the same direction, others will form the opposite view. Everyone’s expectations will change not only in response to changes in the data, but taking into account their entire life experience, their own ideas, and their situation.

2. Expectations are not entirely driven by prices. A broad range of things influences our expectations about price.

3. Lower prices are not always sufficient motivation to delay purchases because everyone prefers to have what they want now, rather than later.

4. Expectations of buyers tend to be met by sellers, if not at first, then fairly soon. In some cases, buyers can hold onto their cash for a bit longer, but most businesses have no choice but to sell their inventories at what the buyer will pay. In other cases, buyers may not be able to delay purchases, or may not wish to, and will pay what they must in order to buy.

5. Everyone—buyers and sellers (and every one of us acts in both of these roles at different times)—has expectations not only about consumer prices, but about wages, employment prospects, even asset prices, the economy in general, the progress of our own life, and the future of our family. A coherent plan of saving and spending takes all of these things into account.

6. Expectations can be met. Buyers have a buying price. Even if not known in advance, they know it when they see it posted. Even if they do not know what they plan to buy in the future, a bargain price will be met by buyers.

7. People only need so much cash. Beyond that, they start to look around for either consumption goods, or investments.

This is the outlook form a neo-classical ‘demand-constrained’ economy. However as Steve Keen shows with Janos Kornai’s analysis of a Resource-constrained economy:

The question is the following: what are the constraints limiting efforts at increasing production? […] Constraints are divided into three large groups:

1. Resource constraints: The use of real inputs by production activities cannot exceed the volume of available resources. These are constraints of a physical or technical nature […]
2. Demand constraints: Sale of the product cannot exceed the buyer’s demand at given prices.
3. Budget constraints: Financial expenses of the firm cannot exceed the amount of its initial money stock and of its proceeds from sales.
From Steve Keen, 2011, “Debunking Economics”, Zed Books. (p.114)

So far from the ‘rational actors’ “only needing so much cash” and deciding whether to spend or not, rather as budget constraints for ‘rational actors’ manifest in an absence of credit and lack of work/income, it will come down to a case of what they can afford. And with money in both the form of cash and credit disappearing, together with resource constraints keeping the price of things like energy higher despite falling demand, demand for anything is going to start going off the edge of that cliff. When hunger kicks in it won’t be the latest £7k smart phone they hanker after but the early potato:

{in Greece} We are now seeing on the island the formation of alternative, collective systems of survival where people are trading not on the basis of cash but on the basis of skills sharing and co-operative working. Local trading systems are now up and running both in Karlovassi and Pythagorio. Friends in the south of the island are now harvesting olives in return for oil and wood. Barter systems are emerging. The owner of one of the biggest hotels in Karlovassi was telling me only the other day that he confidently expected to see such activities become increasingly common place on the island as people traded their garden surpluses (chickens, vegetables, etc) for goods and services they could not otherwise secure as they had no cash.

The irony here is that neo-classical economics sees every economic transaction as a form of barter and so does not consider money or debt in their theories.

I can just imagine the neo-classical economist hedge fund manager trying desperately to fit that into their HFT algorithms…


February 18, 2013 at 3:14 am #6946



I say if you can buy a house for less than it costs to rent that same house, its a grand idea. Otherwise its just various versions of leveraged speculation which is a fine thing as long as you know that is what you are doing, you don’t anticipate major deflation, and you aren’t using a full recourse loan.

Steve Keen observed that banks these days don’t need reserves first in order to lend – step #1 is to get a willing borrower, and only then do they engage in step #2 where they run out and find the reserves to backstop the lending before the regulators get upset. The argument made sense to me.

In other words, more reserves won’t do squat to encourage lending because that is Just Not How Things Work. Credit growth isn’t happening because there aren’t enough willing borrowers, not because of some lack of reserves.


H&S pattern … looks like one, but as a practical matter, I’m gonna say it won’t function the same way, because its a % change y/o/y chart first of all, and second of all because those chart patterns are useful because of the fear/greed psychology of market participants interacting with various historical price levels and this is a derivative of the change in total credit which is kind of not the same thing. I don’t think regular people in the nation look at this month’s credit growth and either act to get a loan or not based on the net change!

However I do see a pattern of lower lows, and as trends go, it looks ugly. I predict things will go lower, absent any dramatic intervention. As they say, the trend is your friend, so go with the odds.

I read the Professor’s link, and it reminded me of those econ classes I took during my over-lengthy undergraduate career. Honestly it felt like I was listening to a pair of virgin psych grad students having a long and detailed discussion about sex. But that’s just my opinion, worth the paper its printed on, etc.

As I understand it, the deflation spiral happens after a bubble pop because both default AND repayment result in credit money being destroyed, which results in money becoming more scarce, which makes it more difficult systemically for others to get the money to repay their debts causing more defaults resulting in more credit money being destroyed. This continues until the overall debt level is reduced to a point where the debt level is sustainable for the incomes available to service that debt.

One of the very confusing things about this pop is that absolute prices of many things are rising. I believe resource constraints (declining ore grades, oil finds, etc) are a big reason why some prices are increasing. Government support of particular sectors is another reason. It is important to be clear about which prices are going up, which ones are going down, and why. But I believe that over time, the level of credit money in the economy will eventually have a strong influence in the general direction of prices, so that’s the thing to watch.

February 18, 2013 at 3:43 am #6947


Deflation arrives on little cats feet, silently in other words. Until proven otherwise I will continue to believe in Nicole’s definition of deflation which includes the a decline in the amount of systematic credit.

It has occurred to me that deflation is evidencing itself not in the decline of prices but the decline of the number of people participating in the economy or participating less, or to put it simply becoming poorer. This is the sort of deflation which the system can exist with. Truth be told it is the deflation the Anglo speaking political elites embrace. They want a growing underclass in the belief that this will lead the underclass to be more ‘conservative’. Of course there would come a point where either the deflated class becomes too large for corporations to garner profits, ie. Walmart, or where the underclass revolts. Well such is an impossibility in America. In America the losers hide away by choice or are hidden away by force. As for the EU in this regard I have no clue. I would add Mitt Romeny put his finger on the accepted number for the underclass, 47%. We will see.

February 18, 2013 at 3:55 am #6948


I should add as an addendum to the below post #6658 this blog post from 10 years ago about American conservatism. Don’t get me wrong I have no partisan purpose. Not along accepted American lines at any rate.

Dead Right by John Holbo

“The thing that makes capitalism good, apparently, is not that it generates wealth more efficiently than other known economic engines. No, the thing that makes capitalism good is that, by forcing people to live precarious lives, it causes them to live in fear of losing everything and therefore to adopt – as fearful people will – a cowed and subservient posture: in a word, they behave ‘conservatively’. Of course, crouching to protect themselves and their loved ones from the eternal lash of risk precisely won’t preserve these workers from risk. But the point isn’t to induce a society-wide conformist crouch by way of making the workers safe and happy. The point is to induce a society-wide conformist crouch. Period. A solid foundaton is hereby laid for a desirable social order.”


February 18, 2013 at 4:26 am #6949


I would be extremely wary in giving financial advice and green-light to debt for someone in Eastern Europe (or just about anywhere in general). Things may be very different from bankruptcy laws to repo methods. Vinnie the kneecapper, Stoneleigh’s favourite character, may be closer than you think in some parts of the world.

February 18, 2013 at 7:25 am #6953


Hi Dave,

One of the very confusing things about this pop is that absolute prices of many things are rising. I believe resource constraints (declining ore grades, oil finds, etc) are a big reason why some prices are increasing. Government support of particular sectors is another reason. It is important to be clear about which prices are going up, which ones are going down, and why. But I believe that over time, the level of credit money in the economy will eventually have a strong influence in the general direction of prices, so that’s the thing to watch.

History rhymes but never repeats? Unlike the 1930s when oil was in a glut due in part to the Texas wildcat strike, today we have an increasing ‘difficulty’ increasing oil and other energy supplies without incurring huge fiscal costs too, yet alone the extra energy needed to find the ‘extra energy’ which decreases the EROEI. And as Ayres and Warr have shown, energy or more specifically ‘work’ (exergy services) is a key (if not the key) driver of economic expansion.

Our understandings and expectations of the world have been shaped by our experience of economic growth. The dynamic stability of that growth has habituated us to what is ‘normal.’ That normal must soon shatter. – David Korowicz

…Since crude oil production has been on an undulating plateau since 2005 while demand has increased (Hirsch et al, 2010), this has put huge upward pressure on the price of oil, and several commentators have drawn the conclusion that these high oil prices signify the end (Heinberg, 2011; Rubin, 2012) or at least the twilight (Alexander, 2011a; 2012a) of economic growth globally. If this is true, we are living at the dawn of a new age, and should be bracing for impact.

We are in a new paradigm: not only has the rug been pulled out from under all the old world theories of perpetual economic growth, but the ground beneath is not there, but way back yonder at the cliff edge we passed over a while back, having been hidden by said rug. All 7 billion of us and counting…

As I have posted elsewhere:

One thing on the three ‘Es’ of Economy, Energy and Environment, is that I suspect we will not get one after the other, but rather one feeding into the others, thus while we currently have an economic crisis, energy is now feeding into that crisis and causing greater disruption. So too as we go further down the road the environmental crisis (here I am referring to things like ocean depletion and pollution, soil erosion, groundwater and aquifer depletion amongst many others never talked about) will feed into the other two and together will form a maelstrom of consequences.

And as Dave said (which could be said of most neo-classical economists):

Honestly it felt like I was listening to a pair of virgin psych grad students having a long and detailed discussion about sex.

Ain’t that the truth! :whistle:


February 18, 2013 at 1:14 pm #6954



I’d venture to say that borrowing money from Vinnie the Kneecapper (or any of his close cousins) might easily fall under the heading of a “full recourse loan”, which was one of the things I suggested it might be wise to avoid!


I think we both read the same stuff.

One reason why I think its important to be clear about why certain prices are rising is that mis-assigning responsibility to a particular cause could lead one to make a bad policy decision.

For instance, if the political class thought that oil prices were rising for monetary reasons, they might consider tightening credit, which wouldn’t really help the situation if oil prices were actually rising because of scarcity and/or resource depletion.

February 18, 2013 at 2:46 pm #6955

Alexander Ac

Dave an p01,

thanks for insight. No worries there, I do not intend to go into any kind of debt, since that takes my freedom of act (in the long-term).

I also do not have children (yet), since I did not figure out how would I explain to them the tragic state od the world in the coming decades and hey, had my potential children to grow up, they will likely to have their on children etc., so I am not sure thinking in decades ahead it long enough perspective.

I think “bottleneck” years are ahead of us starting today and each new soul to this world will have to experience that – soooner or later. Unsustainable growth (and then contraction) of credit is just one of many irresponsible things people do for greed and immediate survival, or something like that.

I am not even mentioning the climate change issu here, since this is absolute manifestation of our collective failure as a species….



February 18, 2013 at 7:51 pm #6956


@Dave you might have missed the “Eastern Europe” part. Sometimes the laws are only applicable when benefiting the top of the pyramid over there. They are a bit more advanced than the first world in this matter, but the first world catches up fast from what I can observe. Also, the deflation argument does not stand at all, for example in the case of local currency hyperinflation and the loans denominated in another currency which might not devalue as much or might even increase.

February 18, 2013 at 8:46 pm #6957



I quite agree there are definitely things you should probably not do, and one of them is earn money in one currency, and have a loan in another currency. Especially if the borrowed currency is one of those safe-haven currencies. Unless you really enjoy currency risk of course.

I think its possible for there to be conditions under which buying a house using a loan is a good idea. I’m certainly not going to so do, simply because the math doesn’t work out where I live, I abhor debt, and my income is not so dependable right now. But the math might work out better elsewhere, and I’m going to keep an open mind about such a possibility. Real Estate is always local.

I am more than passingly familiar with how rules differ around the world. I’m living right now in Asia, for instance. Even though I still write as an American and I still think of myself that way, I don’t currently live in North America. Where I am, the rules are most definitely more flexible, especially if you are well-connected.

February 19, 2013 at 2:23 am #6958


“Beyond belief? UK (price) inflation 2001-11″

Please enlarge in new window

February 20, 2013 at 3:34 pm #6968

Alexander Ac

Hi all again,

just want to thank to Dave and TAE, I used your material in my article about deflation in Europe – and some people found it interesting and it went to prime time in TV News – so maybe some people will wake to the reality of deflation, though other “analysts” think Eurozone has already “hit the bottom”, so lets see…. :-)


February 20, 2013 at 7:22 pm #6970

Raúl Ilargi Meijer

Nassim et al,

Check this:

How UK house prices have risen 43-fold since 1971

February 20, 2013 at 7:27 pm #6971



Glad it worked out! Hopefully people will learn to follow the data regardless where it leads. That’s what I try and do.

I have another article I’m preparing analyzing the situation in Spain, with a more focused set of charts. I still need to do a bit more research but from what I see right now, Spain is pretty far from “hitting bottom.”

Not to spoil the surprise or anything.

I love the international flavor here. More perspectives can only help us figure out the truth.

February 20, 2013 at 8:06 pm #6972



This is really interesting to me – a great example of how price inflation happens differently in the different sectors. Its not a simple question of money creation or destruction, it requires a more complicated model than that. I think money creation plays a pretty big role, but the shortage of “new land” plays a part too. You can import cheaper food to lower costs, but the amount of land remains the same. Lastly, cheap energy was used to build the older houses, while building a new house is built under the current energy & resource cost structure.

Pop growth from 1971 until now: 12%.

So a combination: mortgage lending (likely much higher debt levels), pop growth, expensive energy, and no more land. Bananas and milk seem easier to manage costs for.

So many interesting problems, not enough time to model them all.

February 21, 2013 at 4:24 am #6974

Raúl Ilargi Meijer

Bulgaria succumbs to euro deflation curse

Another euro-pegged government defending an overvalued exchange rate bites the dust, a reminder that the underlying economic and social disaster across the Europe’s Arc of Depression is still getting worse.

Bulgarian prime minister Boiko Borisov resigned this morning after days of mass protests against austerity across the country.

“I will not participate in a government under which police are beating people. Every drop of blood is a shame for us,” he said. “Our power was handed to us by the people, today we are handing it back to them.”

February 21, 2013 at 4:32 am #6975

Raúl Ilargi Meijer

Well, deflation’s a popular topic all of a sudden. Not that the pundits seem to have a grip on the topic.

Losing our AAA rating could mean bank collapse and deflation

The one thing worse than a downgrade leading to yields dropping is a downgrade leading to them spiking, and there is no guarantee that for the UK the reaction would be the former. UK growth prospects are already terrible, and our banks are much more extended than US ones, while British households are more indebted than those in France. Furthermore, the AAA rating is central to the UK’s international reputation as a finance centre.

If our growth prospects deteriorate even further, then without even higher inflation, UK households will default on their mortgages, bankrupting British banks and thereby bankrupting the Government if it stands behind the banks. We have already seen that happen in Ireland and Spain. It could happen here, too.

Banks in this country are doubly exposed, because regulators have forced them to hold vast amounts of UK government debt. Even relatively modest rises in government bond yields, implying some fall in government bond prices, would impose huge losses on UK banks. The Bank of England has suggested that UK banks already need £60bn of extra capital. Taking large losses on UK government bonds could push them over the edge.

February 21, 2013 at 8:13 am #6977

Viscount St. Albans

Re: Bulgarian Government Collapse

Two things strike me:

1) Just as Greece is part of EU periphery (with Germany at the center), Bulgaria is part of the South Eastern Europe Periphery (with Greece at its Center). Prior to the Greek sovereign debt crisis, Greek banks lent heavily to banks and businesses throughout Serbia, Bulgaria, Romania, Macedonia, etc. One might expect to see a collapse of Greece’s peripheral trading colonies before an outright Greek collapse. The unrest in Bulgaria fits.

2) Bulgaria becomes a cautionary tale regarding the dangers of selling off / privatizing critical national infrastructure to companies in foreign nations.
Bulgaria is a net electricity exporter throughout Southeastern Europe. Its electricity generation and distribution assets are more than sufficient to supply the Bulgarian population with enough left over for export. In 2004, Bulgaria privatized most of its electrical distribution assets by selling them to several foreign companies including the Czech company CZE. Net result: domestic Bulgarian electricity bills have skyrocketed precipitating mass protests (the largest since the fall of Communism in 1989) and a demand to re-nationalize the electricity distribution assets.

February 21, 2013 at 6:14 pm #6978


Hi Dave,

For instance, if the political class thought that oil prices were rising for monetary reasons, they might consider tightening credit, which wouldn’t really help the situation if oil prices were actually rising because of scarcity and/or resource depletion.

IMHO I see it as differing ‘systems’ reacting. The ‘political’ system which in the UK tends to be very ‘policy’ reactive compared to the say Germany’s more ‘precautionary’ approach, though more recently the Germans have been forced down the reactionary path due to the shear force of circumstance, something which will be much more prevalent as things really start to kick off. Thus in terms of energy, the Germans tended to have a more forward looking precautionary approach with plenty of structured planning, the UK on the other hand with its ridiculous ‘laissez fair’ leave it all to the market approach has only a reactionary response. Thus, instead of doing something about the problem which they knew about years ago which has led to the current looming crisis with fuel bills and supply constraints:


– By 2015 the Energy Demand in the UK Could Exceed Supply by 23% at Peak Times
- The Impact of the ‘Real’ Energy Gap on GDP Will be Equivalent to GBP108bn a Year
- GBP3.7k a Year Cost for Every Working Adult In The Country
- Powercuts are Now Just as Likely in the Summer as the Winter
The UK energy gap is much larger and closer than currently being reported, according to a new white paper issued by LogicaCMG, a leading provider of business services to the energy sector. Within ten years the gap could cost UK businesses over GBP108 billion a year.

It’s a good job the Prime Minister is in India he can get to see how a country manages with constant blackouts and power shortages, as that is soon to start happening here in the UK.

The chance of large power cuts – those that hit more than a million homes – will be 300 times more likely by 2015.

The only upside would be if the UK gov’t pushed some of the ‘quantitative easing’ into the power industry to renew the infrastructure. Who knows that might even boost GDP and ‘Growth’.

However the other system of Finance and Investment will put paid to all that by betting, sorry ‘speculating’ on fuel and energy prices, regardless of the actual costs of production. Fuel prices in the UK are set to hit record highs due in part to a falling sterling but also to speculation.


February 21, 2013 at 6:40 pm #6979


HI Illarghi.



February 22, 2013 at 5:06 pm #6983

Alexander Ac


yes – Britain, then Bulgaria, and recently Italy too:

In fact, as the ABI notes, loans to families and companies dropped by record amounts in January.


Dave – looking forward for your take on Spain (where the amount of bad loans started to decline?)


February 23, 2013 at 10:50 am #6988



Still pulling together the research on Spain. To give you a flavor:

Spain’s new Bad Bank (Banco Malo – actually named Sareb) has run off and bought 37 billion euros in bad debt; 66% are developer loans, 33% are foreclosed homes and property under construction. For these loans it paid 46% of face value – a discount of 54%. While a lot of articles I read suggest the loans are simply being “transferred”, what is happening is, the bad loans are in fact being SOLD, and the price averages 46 cents on the euro.

When sold, the selling bank must at that point crystallize losses, so after pretending for so long these loans are performing just fine and are worth 100 cents on the euro, now the selling banks must immediately write down these loans and take their losses so they are not super happy about that part. As for the prices they are getting – I’d say the level of joy should be relatively high, since Banco Malo is dramatically overpaying for these loans.

It may sound like a 54% discount is a good price, but all you have to know is that fully completed homes are selling on average right now for 53 cents on the euro to understand that overpayment is occurring. Should we imagine that raw land and half-finished houses should get only a 54% discount? Not bloody likely. NAMA, Ireland’s version of Banco Malo, having had 3 years of experience trying to sell the crap they picked up for 42 cents on the dollar, are getting on average 25 cents on their recoveries. And some of NAMA’s crap is only worth about 10 cents.

In all things like this, there are winners and losers. The Loser, in this case, is taxpayer-backed Banco Malo, which is paying 47 cents for an asset that might be worth 20 cents at best. The worst, most offensive, most underwater, hopeless, and nonperforming loans are being sold (oh I’m sorry, “transferred”) to Banco Malo. I wish there was another name I could give the bank – Banco Pathetico, perhaps, or maybe Banco Estupido, for paying 46 cents when it likely should be paying at most 20.

If the Spanish people realized that 37 billion of their euros were being basically handed over to their friendly bankers, they’d be more than slightly annoyed, I suspect. But somehow its all happened under the radar. Perhaps it is because of the neutral and obfuscatory language used in the articles describing what is happening. Who knows.

Anyhow, this is just a taste. Coming up with estimates for just how much has gone bad, how much has been written off, how much overpayment is occurring, and how much remains is complicated. Perhaps I can get it done this weekend.

February 23, 2013 at 3:50 pm #6989

Raúl Ilargi Meijer

Well, Moody’s did it: The UK lost its AAA status.

Good time to go back to the link I posted earlier in this thread, Losing Our AAA Rating Could Mean Bank Collapse And Deflation. From that link:

Banks in this country are doubly exposed, because regulators have forced them to hold vast amounts of UK government debt.

If that is true in the UK, it is even more so in Spain, which had/has a shadow policy to have its banks apply for EU money in order to buy sovereign bonds; a nice topic for Dave to run with.

March 3, 2013 at 7:40 pm #7019


Hi Folks,

Stoneleigh wrote:
Europe is indeed tipping over the edge again, into phase II of the credit crunch. For those minded to gamble with something they can afford to lose, shorting would be the way to go at this point IMO (bearing in mind that all gambling is risky, that governments can change the rules so that you may not be able collect on having been right, and that there will be far more ways to lose your shirt than to make a lot of money, even if you’re right about the trend).

The unnaturally low level of volatility, combined with strong insider selling against a backdrop of optimism verging on euphoria, is a strong red flag warning. deflation is a very powerful force, and can take hold very quickly. When it does it very rapidly becomes a self-fulfilling prophecy.

Watch Europe as it’s in the vanguard of deflation, and in some countries acute liquidity crunch already. This is where the rest of us are headed.

And so it begins (again and in earnest this time):

Bank of England mulls negative interest rates

Paul Tucker, deputy governor for financial stability, raised the possibility in front of MPs after saying the Bank could be doing more to help the economy, including measures to boost lending to small businesses.

Negative interest rates would mean high street lenders paying the central bank to place their money with it. The move would be intended to encourage more lending to businesses and households. But it could also lead to a reduction in the interest paid on individual savers’ accounts held with high street banks.

The Bank has considered cutting rates from their record low of 0.5pc in the past but decided against doing so for fear of bankrupting a number of smaller building societies. To get round the problem, the Bank is reviewing a possible change to its remit so it can set a separate interest rate specifically for excess deposits placed by financial institutions at the central bank.

Other central banks, such as the European Central Bank, have two rates – a base rate and a deposit rate. In the UK, Bank sources said, a new so-called deposit rate could be charged on funds placed with the central bank above a certain level. For example, the first £1bn of banks’ money held could be charged at the existing base rate, and the rest at the new ‘deposit rate’.

So in other words the banks can no longer get ‘cash on their cash’, albeit at the paltry 0.5%, but rather are effectively paying the BoE to hold their money for them so forcing out into the ‘market’.

But maybe they don’t want to lend due to all the ‘risk’ that they suddenly see out there, and so will find other ways to get their pound of flesh:

Couple unable to pay its interest-only mortgage ‘bullied and intimidated’ by government agency

By August 2012, with under two years to run, UKAR said that monthly payments of £2,982 were due – and these were now being added to the Jacksons’ total mortgage in the form of arrears.
Arrears on their account today are £15,000 and increasing at the rate of £2,700 a month. When the property is eventually sold, UKAR will claim these arrears along with the original mortgage balance.
The arrears could, within less than a year, wipe out all the equity in the property. The Jacksons say UKAR is effectively enforcing a brutal mortgage arrears policy to obtain a far greater part of the property’s eventual sale value.
‘We are sick with worry over these arrears,’ the Jacksons say. ‘We accept the house will have to be sold to pay the outstanding mortgage but all we ask is that we are allowed to pay interest only for the rest of the term, which we can afford to do.’
UKAR admits that its handling of the Jacksons’ case has been poor in some minor respects, but maintains it is right to demand full monthly repayments and, if these are not met, to add them to the total owed.

And even if you can pay the mortgage now, you may not be able to for much longer:

Trackers don’t track and fixes move: The truth about mortgage deals
The Bank of Ireland is about to increase the cost of its tracker mortgages, despite the base rate not increasing, but is your mortgage rate safe?
Thousands of Bank of Ireland mortgage customers are to be hit with higher repayment costs on their tracker mortgages, whether the Bank of England Base rate changes or not.

The lender has announced rate hikes to take effect from May, seeing rates for 13,500 customers on base rate tracker deals double.

The changes mean that a buy-to-let mortgage customer on a typical interest rate of 2.25% will see their rate climb to 4.99% from May 1.

Residential customers will see increases introduced in two stages: 2.49% plus base rate will take effect from May 1, changing again to base rate plus 3.99% on October 1, jumping to an overall rate of 4.49% if the base rate stays at 0.5%.

I guess they must think that the ’greedy landlords’ are putting up their rents deliberately to cash in a make money, but while there are many who are profiteering – usually those with little in the way of debt and or who bought before the boom, the fact is being a landlord does still (just) have its obligations, such as providing appliance and services safety certificates and maintaining the property to a reasonable standard. That costs money, and those costs are also going up. Also given that many bought on ‘interest only’ mortgages, at some stage they might find themselves in negative equity. As TAE have often said, and even despite increasing rents, the risk to the landlord is still greater.

Maybe that is why the FSA are targeting Banks who ‘game’ their liabilities:

Banks wary as FSA targets “gaming” of risk weights
* UK tells banks to take more conservative view of loan risk

* Bankers see risk to economy and models from standardisation

By Steve Slater
LONDON, Feb 25 (Reuters) – Britain’s banks could need tens of billions of pounds more capital as part of a crackdown on internal risk models that are deterring investors and undermining efforts to shield the global financial system from future shocks.

The Financial Services Authority has been assessing how lenders calculate the riskiness of their mortgages and other loans to make sure they are setting aside enough money to cover potential losses.

The FSA has stepped up that scrutiny in the past two months, banking sources said, as part of a wider trend in Europe towards standardising guidelines on how banks should calculate the riskiness of loans amid concern some are gaming their internal models to flatter their financial health.

To meet the new rules, lenders are cutting their risk-weighted assets (RWAs) through disposals, by cutting risky businesses, and hedging. They are also tinkering with their internal models to make their holdings appear less risky, undermining the credibility of Basel III.


The Bank of England’s Financial Policy Committee (FPC), which looks out for trouble spots in the financial system, said in November the way that banks calculated RWAs was too “complex and opaque” and needed fixing. The FSA was told to assess the problem and report back for a March 19 FPC meeting.

No wonder then that some have started to remove ‘insurance’ cover for certain ‘liabilities’:

Ireland to remove bank deposit guarantee from end-March

DUBLIN (Reuters) – Ireland (OTC BB: IRLD – news) will remove a state guarantee on bank deposits next month to help ease pressure on loss-making lenders and move the country further towards exiting its EU/IMF bailout, finance minister Michael Noonan said.

Ireland’s almost fully state-owned banks, whose rescue cost the equivalent of 40 percent of annual economic output, have had widening losses partly because of fees they had to pay for the guarantee, and they have been clamouring for its removal for months.

The removal of the guarantee will not impact the vast majority of bank customers because deposits over 100,000 euros are covered by a separate guarantee which has been in operation in Ireland since 1995.

The Eligible Liabilities Guarantee (ELG) scheme guaranteed deposits over 100,000 euros in case banks got into trouble. Lenders had to pay a fee to the government for the guarantee, which cost the country’s three remaining domestic banks 1.1 billion euros last year.

So between the hard place (negative interest on their capital) and the rock (inherent risk re-emerging and no way to cover it up) it looks like the future of lending is getting decidedly Hobsonian…

and deflationary. Has the FIRE finally gone out?


March 4, 2013 at 11:31 am #7022



Here is another interesting article, this time by the FT

But I found myself puzzled that these self-styled Masters of the Junior-verse were hell-bent on home ownership, ready to spend every penny they had – and more – on something that may yield no financial reward and which they will probably have to soon abandon when dispatched to make money in some distant corner of the non-economically paralysed world.

Even among these sharpies, owning is still, in spite of all the difficulties of getting on the ladder – mortgage requirements for first-time buyers are at their highest level for generations – the only game in town.


It seems to me that lots of young people in London seem to be very keen to become debt-slaves – despite all the warning signs over the past 5 years. Intriguing!

March 4, 2013 at 6:39 pm #7024


Hi Nassim,

Well, after all said and done, an “Englishman’s home is his castle” n’est pas? Such is the power of propaganda and social norms. That and the fact that decent affordable housing for rent has always been problematic in the UK due to the feudal class system of serfs and lords and the dehumanisation by each party by the other. So the serfs (latterly working class) saw the upper class as greedy morons; the upper class saw the poor as ignorant wretches. (Noblesse Oblige, if it ever existed was killed off with the French revolution.) Thus the rise of the slum landlord, both then and now. It was only with the rise of socialism in the twentieth century that saw a brief respite with the ‘homes for heroes’ and slum clearances, which worked for a while (in the inter war years) till the elite saw again a way to make a quick buck with cheap poor quality development rolled out across the land in the sixties and seventies. Couple with bad government planning and the destruction of existing communities it was a recipe for disaster. Then came neo-liberalism in the 1980’s and the buy your own council house bonanza (though that right had in fact existed for quite a while already), which saw lucrative gains for those fortunate enough to live in a ‘nice’ area, and total loses for those on sink estates.

The British model of renting and the whole attitude is summed up in that FT article:

By Ed Hammond, FT. March 1, 2013 7:16 pm
“Britain’s inability to wean itself off home ownership is perplexing. Every other large European nation has managed to foster a sensible market for rented housing alongside traditional owner-occupation. From the sprawling ex-industrial workers’ estates of West Germany, now leased out on 30-year terms, to Switzerland’s luxury housing complexes, renting is a professionalised mass-market phenomenon. In those two countries, half and two-thirds, respectively, of all households rent. In the US, too, renting, both short- and long-term, is – certainly within the country’s metropolises – the norm.

In contrast, renting has never been considered a “grown-up” option in Britain. Rather, it is still seen, predominantly, as a stopgap between parental nest and home ownership. This view of renting as a dissolute middle ground has stunted the growth of a functional market. The country is the poorer for it. Where continental Europeans have an efficient rental market stewarded by responsible and, crucially, accountable institutional landlords, Britons have buy-to-let: the opportunistic love child of Dickensian skulduggery and pointy-shoed speculation.

The British rental model, if it can rightfully be called that, is primarily a way for the landlord to siphon some cash from his investment while waiting for the market to inflate enough to flip it. In this lies a big part of the problem. If the homeowner is renting only as a passing measure, the uncertainty inherent for any tenant makes it impossible to consider it as a realistic long-term option any more than they might a friendship with a lion.”

Thus status in the caste/class system is paramount:

A firm demonstration of one’s importance in the world, as my poker companions showed, often matters more than quietly playing the hand that makes most financial sense.

Of course that doesn’t mean that they are actually that ‘sharp’:

Mortgage borrowers crippled by foreign currency loans
By Jessica Winch | Telegraph – Mon, Feb 25, 2013 09:40 GMT

British home owners who took out foreign currency mortgages have been badly hit by the strong appreciation of the Japanese yen and now face crippling debts.

“The key reason to take out a foreign currency mortgage should be to take a view on exchange rates, in particular if one expects sterling to improve against the currency in which the mortgage is denominated. Too many people took out these loans simply because the interest rate was lower.”
In 2004, yen mortgage rates were around 1pc, while UK rates were around 5pc.

However, the risk with a foreign currency mortgage is that if sterling falls in value against the foreign currency, the monthly repayments go up in sterling terms and more importantly the total amount of the debt in sterling also rises.

The rising level of debt meant that borrowers had to stump up more collateral, such as cash or savings, or the bank could switch their mortgage back into sterling to avoid further losses.
Some of the affected borrowers said they were not fully warned of the risks. Others also discovered they were not covered by UK financial services jurisdiction.
“If individuals do not understand the risks associated with borrowing in foreign currency, then it’s incredibly dangerous to do so.”
The Sunday Telegraph was initially contacted by Paul Coates, 51, an ex-financial agent who works in Singapore as a property agent. He had a yen mortgage with RBS (LSE: RBS.L – news) switched back to sterling in December 2008, which increased the size of his loan by 50pc to £302,688.
Four years later, he is facing legal action in the UK to repossess the property in north Wales, which Mr Coates had bought for his mother.
He said: “I have been very stressed about this for four years and it’s very likely I’ll lose my home in the UK.
“I expected currency risks but what I did not understand and what wasn’t made clear to me was that the bank would switch the mortgage the way it did.
“I think they should have had a stop-loss arrangement to convert the loan at an earlier stage.”
He had fallen behind with his mortgage repayments as he was out of work for a year when the financial crisis hit.
An RBS International spokesman said: “Due to client confidentiality, we are not able to comment on the specifics of this matter.”
David Lewnes, a retired advertising executive, went to live in Singapore nine years ago, after working in east Asia since 1985. He bought a two-bedroom property in east London in 2004 as an investment and was advised to take out a yen mortgage to help reduce the payments on the property.
He took out a mortgage of £345,000 with RBS’s Singapore office following advice from an adviser.
However, the rapid appreciation of the yen from 2007 onwards led to RBS forcing Mr Lewnes to switch his loan back to sterling as the loan exceeded the maximum loan-to-value of 75pc. As a result, his debt increased by 50pc and the total debt of £525,000 exceeded the value of the property.
“While everybody appreciated there was some currency risk, they had no idea of the magnitude of that risk,” Mr Lewnes said. “When the exchange rates started to move the bank should have warned their clients, but they didn’t. They waited until it was a disaster.”
Mr Lewnes has paid down the debt to £450,000 and intends to continue with interest repayments until the loan expires in 2021. He plans to sell the house and use the proceeds to service the debt.
An RBS International spokesman said the bank did provide foreign currency mortgages to clients who requested them in Singapore from 2004 to 2011.

Again hindsight is always 20×20, but as for being a sharpie, I think this shows their edge is somewhat blunted.

But ““When the exchange rates started to move the bank should have warned their clients, but they didn’t.” I mean, didn’t they think to check the exchange rate and set a bail out point themselves? Didn’t they bother to check their mortgage repayments? Seems to me they were perhaps too attached to their ideas of who they were in the world and about how things work. Attachment truly is the source of suffering

Shed with a bed anyone? Somewhere to store your tulip bulbs I suppose…


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