• 148 days Could Crypto Overtake Traditional Investment?
  • 153 days Americans Still Quitting Jobs At Record Pace
  • 155 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 158 days Is The Dollar Too Strong?
  • 158 days Big Tech Disappoints Investors on Earnings Calls
  • 159 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 161 days China Is Quietly Trying To Distance Itself From Russia
  • 161 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 165 days Crypto Investors Won Big In 2021
  • 165 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 166 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 168 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 169 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 172 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 173 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 173 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 175 days Are NFTs About To Take Over Gaming?
  • 176 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 179 days What’s Causing Inflation In The United States?
  • 180 days Intel Joins Russian Exodus as Chip Shortage Digs In
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

Euro Pressure Going Critical

Released 11/28/13

Melt Up Monitor

Melt Up Monitor

The Draghi Dungeon is a worse predicament than the Bernanke Box!

How could this possibly be a 'Dungeon' when the STOXX is going parabolic, the Current Account is surging and the Euro is strong? The answer lies in how this could all occur during six quarters of recession, historic unemployment and slowing exports? Because this is a Euro Currency hole from which Mario Draghi cannot easily escape.


Why Would Draghi Lower Rates When Markets Look Like This?

Rolling 10-Week Flows to European Equity Funds

... And Current Account Flows Look Like This?

Euro-Area Current Account Surplus

... Because

Slowing Growth & A Strong Euro Are Making Bank Loans Rapidly Unpayable

We see the unresolved & 'papered' over banking crisis in the EU raising its head once again. This time it will be with more vengeance!

The catalyst for the crisis is now stemming from the CEE (Central & Eastern Europe). Critically, the forgotten money borrowed by Central and Eastern Europe in Euro's during the EU 'good times' is quickly becoming unpayable.

A recent SNB report warned:

Before the onset of the financial crisis, foreign currency loans to the non-banking sector in Europe became remarkably prevalent. In particular, households and non-financial firms were taking bank loans denominated in lower-yielding foreign currencies and investing in high-yielding domestic currencies (e.g., in the form of home mortgages or business investments), even though these agents did not necessarily have a steady income in the foreign currency concerned. Therefore these retail foreign currency loans were usually dubbed 'small men's carry trade'. Since the crisis, the outstanding volumes of foreign currency loans to the non-banking sector have been slowly declining in some countries due to macro-prudential measures, deleveraging of banks, and the continued slowdown of European economies. Nevertheless a substantial fraction of households and firms still have foreign currency bank loans.

The chart below shows that as of the second quarter of 2013 the majority of the outstanding loans to the non-banking sector in many non-Eurozone countries continue to be denominated in a foreign currency. For example, in Hungary, Romania, Bulgaria, Croatia, Serbia, and Latvia, between 60% and 88% of the outstanding loans to the non-banking sector are denominated in a foreign currency.

Share of foreign currency loans as a percentage of total loans to the non-banking sector in Europe (2013:Q2)

Share of foreign currency loans as a percentage of total loans to the non-banking sector in Europe

While foreign currency loans offer some advantages to borrowers - such as lower interest rates and longer maturities compared to domestic currency loans - they also carry a significant exchange rate risk. A sharp depreciation of the domestic currency can prevent unhedged borrowers from being able to service their foreign currency loans. As a result, these loans are now creating a substantial systemic risk to the European banking sector. Banks could fail jointly as a result of their exposure to unhedged households and non-financial firms which default on their loans when the domestic currency depreciates sharply.

Systemic risk measures show that foreign currency loans to the non-banking sector create substantial risks to the banking sector from a 'common market shock 'perspective. High persistence and low volatility of the systemic risk measures indicate that short-term policies would be unable to swiftly reduce this risk.

A strong Euro, falling CEE growth and investment and rising Current Account deficits are taking the situation 'critical'.

Net International Investment Position and Current Account Balance

The banking situation in the CEE (Central and Eastern Europe) is deteriorating rapidly as can be seen by Poland confiscating Pensions, the Czech Republic wanting the ability to debase their currency by deferring Euro usage, Slovenia's 'Cyprus like' banking problems etc. From the Balkans to the Baltic States the problems are increasing and Draghi is acutely aware of what this means to EU banks.


Draghi Debasement High Probability Outcome

Improvimg European Outlook

The ECB must drive the Euro down soon or the Euro Banking crisis, which was never resolved and only 'obscured', will take the banks into an even worse crisis.

Carry Trade Consolidation Driver: Euro Likely to Weaken Temporarily Relative to Yen

The Japanese Carry Trade (aka ABE-nomics) is consistently shown on a daily basis to be a major controller of liquidity flows. The Japanese Carry Trade Liquidity Pump of $65B/Month is being leveraged up significantly.

This is about to temporarily correct despite the Yen weakening as presently expected by Carry traders.

  • JPY Must Continue to Weaken Expected
  • EUR Must not Weaken Expected The Surprise Factor


Draghi Dungeon

European Issues and Options

An ECB version of QE has now urgently been placed on the table.

Draghi is Running Out of Time

European Flow of Corporate Loans

European Monetary Growth

Remember: The EURJPY Carry Is Driving The Us Stock Market Meltup

EUR/JPY versus S&P500 Chart

Analytic Expectations - A Message in the Technicals

EUR/JPY Daily Chart


Watch our July LONGWave Video: Confusing Cross Currents


30 Minutes, 44 Slides

 


Learn How To Trade A Crackup Boom at GordonTLong.com

Request your FREE TWO MONTH TRIAL subscription of the Market Analytics and Technical Analysis (MATA) Report.
No Obligations. No Credit Card.

 

Back to homepage

Leave a comment

Leave a comment