Euro contagion

by on November 8, 2011 at 6:29 am in Current Affairs, Economics | Permalink

Credit conditions have steadily eased since the end of the recession but that process almost ground to a halt in the last three months, with only five domestic banks out of 50 saying that they relaxed their standards for lending to large companies. Two banks had tightened conditions.

There was also a sharper retrenchment by US branches of foreign banks: 23 per cent of such operations tightened their lending terms, raising their interest rate spreads and cutting back on the amount and period for which they are willing to lend.

Here is more, from the FT.  There is also a negative dynamic playing out within the European banking system itself:

Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses. The European Banking Authority is requiring lenders to boost capital by 106 billion euros after marking their government debt to market values. The trend may undermine European leaders’ efforts to lower borrowing costs for countries such as Greece and Italy, while generating larger writedowns and capital shortfalls.

Roubini claims the ECB is doubling its rate of bond purchases, yet as of today the Italian yield was hitting an unsustainable 6.74 percent.  Here is Italian gdp growth since 1960:

1 josh November 8, 2011 at 6:45 am

what a dumb chart.

2 bodley heath November 8, 2011 at 7:26 am

please elaborate o great genuis

3 josh November 8, 2011 at 8:22 am


4 Bill November 8, 2011 at 10:11 am

I will.

Match it against other countries in the Eurozone to give it context, or have an aggregate Eurozone chart to measure it against.

Context matters.

Otherwise, you read into the chart whatever you perceive the world is ex-Italy.

5 Bill November 8, 2011 at 10:17 am

To prove my point, draw a line over the Italy chart showing what you think overall Euro growth rates ex-Italy is during the same period.

Now, step back: ask yourself, what information did you have to make that drawing?

6 Bill November 8, 2011 at 10:30 am

Without looking at the chart again, write down the time period you think was covered in the chart.

Then, ask what do you think is the point is trying to illustrate. I think it is that overall GDP growth rate is visibly DECLINING.

Now, go back to the chart, and break it into two periods: 1960 to 1983, and a second period, 1983 to date.

One chart 1960 to 1983 shows growth rate declining, while the other chart, 1983 to 2010 shows no change in growth rate.

7 Bill November 8, 2011 at 10:31 am

Now, go back and look at EU growth ex-Italy.

8 Bill November 8, 2011 at 10:40 am

What you could say from the revised charts is that a conservative Italian government had a flat growth rate. Was that the point?

9 Bill November 8, 2011 at 10:42 am

I shouldn’t have said flat: it is still positive, but not just as big as earlier periods.

10 jimi November 8, 2011 at 11:15 am

I believe it would be in the best interests of this blog if you would organize your thoughts before posting.

11 Bill November 8, 2011 at 3:36 pm

jimi, I have profound indifference to your comment.

By the way, jimi, did you also notice that the chart was year over year growth, not growth.

Do you know the difference between speed and acceleration, between a steady rate and a derrivative.

Why don’t you contribute a substantive comment, rather than a comment about how someone else gets people to look at data.

12 Bill November 8, 2011 at 4:21 pm

Chart says “real growth on previous year” and the change from the real growth on previous year. The trend line is change in real growth over the previous years real growth.

13 george November 8, 2011 at 6:48 am

The great stagnation!

14 Bill November 8, 2011 at 3:48 pm

No, the rate of INCREASE of growth declined over one period and remained the same over another–the rate of growth year over the prior years growth is what the chart shows, not what you “saw”.

15 Bill November 8, 2011 at 4:04 pm

If you want to see a different picture, look at each years annual growth–or just look at each years GDP.

16 Bill November 8, 2011 at 4:12 pm

Here is a source for each EU country and for comparison purposes the total EU: If you want to see real growth over the previous years for EU countries together and for just Italy, go here:

17 TallDave November 25, 2011 at 9:37 pm

And then you’ll understand Tyler’s point.

18 dearieme November 8, 2011 at 6:52 am

What the bugger is a “negative dynamic” ?

19 rjs November 8, 2011 at 9:59 am

josh knows, but he aint telling…

20 john haskell November 8, 2011 at 7:15 am

The chart is not dumb at all. It shows what happens to countries that enter a monetary union with Germany.

21 Corey November 8, 2011 at 8:32 am

I literally spit up my tea reading that.

22 Brian Donohue November 8, 2011 at 8:42 am

well played

23 Bill November 8, 2011 at 3:51 pm

I spit up for a different reason. See above.

You are looking at a chart of year over year growth rates.

If it grows at 5% in one year and at 4% over the previous year, it shows a 1% DECLINE.

24 Bill November 8, 2011 at 4:11 pm


If you want to see real growth over the previous years for EU countries together and for just Italy, go here:

25 Rahul November 8, 2011 at 7:16 am

Italy is screwed. We all agree. You are preaching to the choir.

26 FE November 8, 2011 at 7:49 am

I know that Italy is a special case with its massive debt, but I want to point out that U.S. Treasuries paid 6.74% as recently as 1997. Many institutions today seem to assume that they will be able to borrow indefinitely at rates well below the norm in recent decades.

27 Lou November 8, 2011 at 9:28 am

The absolute level is unimportant, it’s the relative level that matters because it signals default expectations. Italian bonds are much more expensive to issue than US or German ones, because investors are pricing in a significant possibility of default. No one was expecting a US default in 1997, rates were high because of the monetary policy of the time which was actually the result of a very strong economy.

28 DW November 8, 2011 at 7:58 am

Uncured Contagions are Contagious: An economics poem

One contagion’s a liquidity crisis
Two contagions a show
Three contagions? Ok, Solvency then, I guess
A fourth? Down the drain we all go

29 TallDave November 8, 2011 at 8:41 am

Soon we’ll be having this discussion re France.

30 FYI November 8, 2011 at 9:08 am

I just wonder how long until we will have someone finally saying: ‘Hey, maybe the problem is not just the Euro but this crazy thing called Welfare State”. Maybe at that point we will start getting clear solutions to the problem.

31 Rahul November 8, 2011 at 9:13 am

Are all Welfare states facing a financial crisis? Are things fine and dandy in all nations that you consider non-Welfare States?

32 The Anti-Gnostic November 8, 2011 at 10:13 am

They all run deficits. They all have native populations that aren’t replacing themselves. So yes, unless somebody does something like figure out nuclear fusion, the welfare state will remain one of history’s time-limited experiments.

The welfare states are all betting that immigrants will come over and pay enough taxes and invent enough gew-gaws to bail them out before they have to hyper-inflate. I think what we’ll find out instead is that 1) immigrants don’t want to pay taxes for a bunch of stupid old white people and 2) immigrants get old and sick too.

33 Rahul November 8, 2011 at 10:26 am

The point in time where we run out of potential immigrants seem far away. So far, immigrants seem pretty willing to bear the tax burden in return for the privileges that a western society offers. The burden only gets onerous when faced with a grossly inverted demographic pyramid wherein a few young shoulder the burden of the many old. The trick lies in keeping a stable age-demographic with or without immigration. Either breed like rabbits or import them.

34 The Anti-Gnostic November 8, 2011 at 12:06 pm


You are making the further assumption that just moving the Third World here to work on the tax farm will reproduce ‘Western society.’

It hasn’t in the Third World.

35 Bill November 8, 2011 at 4:07 pm

Are you talking about the welfare states of Sweden, Denmark and Germany?

36 Marian Kechlibar November 9, 2011 at 3:52 am

Bill, those are no longer as generous as Americans tend to think.

In Germany, the Hartz reforms were pretty harsh. If it wasn’t for the language and culture barrier, I don’t believe that US liberals would endorse the current state of German welfare system.

37 Corey November 8, 2011 at 9:13 am

Not until the boomer generation is gone we won’t. That said I don’t have much hope that my generation will have any smaller sense of entitlement. This zuccotti park nonsense is so embarassing.

38 TallDave November 8, 2011 at 10:18 am

It’s always a question of how much socialism you can afford.

In the long run, of course, you’re better off with less socialism and more growth, but that’s rarely the popular position. As the old saw goes: “A democracy… can only exist until the majority discovers it can vote itself largesse out of the public treasury. After that, the majority always votes for the candidate promising the most benefits…” The only mistake there was underestimating just how astoundingly rich well-regulated capitalism could eventually make us, but the demosclerotic greed, sloth, and general sense of entitlement is catching up with increasingly sluggish growth– and as Tyler points out we’ve already eaten a lot of the low-hanging fruit.

39 Andrew M November 8, 2011 at 9:18 am

There’s something I don’t get about mark-to-market. If a bank buys a 30-year government bond yielding 6%, and interest rates subsequently fall, then under m2m that same bond is now worth more, right? So falling interest rates automatically help banks. Right now though we’re close to the zero bound. If rates go up, under m2m the 30-year bond that the bank bought last year will fall in value. Does this mean that if the Fed raises rates, the banks will all be insolvent?

40 Lou November 8, 2011 at 9:36 am

All else equal, their capital ratios will be worse, so they may have to raise equity or otherwise improve their balance sheet.

But it depends on a lot of things. Banks have assets as well as liabilities- are the assets and liabilities fixed or floating rate? Is one side of the balance sheet more or less sensitive to interest rates? Has the bank hedged itself against interest rate changes using derivatives? If so, to what extent?

Banks know how to handle interest rate risk. Unelss there’s a sharp, unexpected increase in rates, it’s probably not going to have a large effect on any major banks.

41 Jonas November 8, 2011 at 4:54 pm

That’s why I think mark to market is a disaster — both on the way up, when it’s mostly fantasy, and on the way down, when it is very enabling of death spirals. Unfortunately, it thrives as a concept because it’s comforting to the ideology of both right and the left. The only real opponents of it that I hear are usually isolated voices from each side.

42 David November 9, 2011 at 1:44 am


There are two issues with mark-to-market (aka fair-value accounting). As you point out, in a regulatory context they can be pro-cyclical. However, accounting also serves an important informational role for investors, creditors and counter-parties. Fair-value provides more and probably better information for relevant outsiders. The regulatory problem is the confluence of simple, mechanistic regulation and fair-value accounting, so the accounting should at most bear half of the blame for any resultant pro-cyclical effects. Smarter regulation would enable both more informative disclosure and mitigation of pro-cyclical tendencies. A discussion of what form such regulation might take would be interesting and worthwhile.

43 jimi November 8, 2011 at 11:17 am

Do your part! Buy Italian wine!

44 Bill November 8, 2011 at 3:44 pm

So, this is your substantive comment.

45 jimi November 8, 2011 at 6:57 pm

Go fuck yourself, Bill.

46 Bill November 8, 2011 at 7:57 pm

I’m sorry you feel that way, but your earlier comment about how I posted elaborations successively at different times made me think you had a substantive comment, but when I thought the wine one I wondered: why is this guy talking this when when all he has to do is make a non-substantive comment about how I posted, and then later makes a non-substantive comment about drinking Italian wine. Evidently he didn’t apply the standard to himself that he would apply to others.

I am sorry if I offended you with the same conduct you directed at me.

47 Marian Kechlibar November 9, 2011 at 3:53 am

Actually, this is still one of the few areas where Italy possesses comparative advantage. Why not.

48 Bill November 8, 2011 at 4:58 pm

Bring back the Good Years of US Economic Growth from 2001-2004. 2004-2007 were Bummer Years: Bet you didn’t know that

You can do the same chart as the Italy chart, and it would show a US decline from 2004 to 2007, believe it or not, and the boom years of 2001-2004

Here’s what you have to recognize: this is a change over the previous year’s increase.

So, US growth in 2001 over the previous year (1.1), 2002 (1.8), 2003 (2.5), 2004 (3.5)–great we’ve been accelerating; now we are declining in the rate of increas 2005 (3.1), 2006 (2.7), 2007 (1.9)

2005, 2006, and 2007 must have been really bad years, compared to 2001 to 2002 or 2001 to 2003.

49 Alan November 8, 2011 at 5:25 pm

No problem there. Just ask Fred Singer, Roy Spencer, Steve McIntyre, Edward Wegman or Anthony Watts to fit a trend line starting in 2009.

50 Bill November 8, 2011 at 5:50 pm

It would go through the ceiling. Ba Boom.

51 peter November 9, 2011 at 7:51 am

makes me wonder how someone could borrow $35K for a degree in puppetry.

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