As the euro crisis re-erupts, a short thread on why it was always much more than a "sovereign debt crisis".
Eurozone banks (first chart) and "non-monetary" financial institutions (eg insurors) had more bonds outstanding in 2010 (€8.6 trillion) than all governments (€6trn).
Eurozone banks (first chart) and "non-monetary" financial institutions (eg insurors) had more bonds outstanding in 2010 (€8.6 trillion) than all governments (€6trn).
Since then, the eurozone bank bond market has shrunk (from €5.5trn to €4.1trn), as banks have leveraged, while the 19 governments outstanding bonds (chart) is up to €8trn.
Because banks hold much of this, their balance sheets they can't survive a sovereign default (eg Greece).
Because banks hold much of this, their balance sheets they can't survive a sovereign default (eg Greece).
This "doom-loop" between banks and governments still exists.
The Italian sovereign bond market has gone into full scale panic today, for very good reason (there is €2trn outstanding). And its spreading fast to others peripherals, as Portugal below shows.
The Italian sovereign bond market has gone into full scale panic today, for very good reason (there is €2trn outstanding). And its spreading fast to others peripherals, as Portugal below shows.
If Italy defaults, its financial institutions will default on their own bonds. Despite significant reductions, by both banks and non-bank financials in Italy, they have close to €700 billion outstanding, as charted below. Add to this the evaporation of share value.
In short, a sovereign default in Italy would, alone, be by far the biggest "credit event" in history. Add its financial institutions and the wave of defaults would be like a tsunami. It would, IMO, be much worse than 2008-12.
ENDS
ENDS
PS: apologies for multiple typos in the thread.
