December 20, 2011 (TSR)- It is no surprise that the ECB has been less than overwhelming in its optimism, unlike Messers Barroso, Van Rompuy et al. when discussing the current and future state of the union that is Europe. While not pessimistic per se, the focus on zee stabilitee and lack of bazooka (no we don’t see the 3Y LTROs as a magic bullet) is perhaps related to their view of the difficulties faced in addressing the needs of an increasingly disparate gaggle of countries. In their December Financial Stability Review, the ECB points to four key risks: (contagion, funding, macroeconomy, and trade imbalances), they fear “euro area financial stability increased considerably in the second half of 2011, as the sovereign risk crisis and its interplay with the banking sector worsened in an environment of weakening macroeconomic growth prospects”. Summarizing into seven charts, the ECB provides a quick-and-dirty perspectiveon what is increasingly becoming obvious as capital flows and funding needs interplay with one another (for worse rather than better).



SNAFU is an acronym that stands for situation normal: all fucked up. It is sometimes bowdlerized to all fouled up or similar.In simple terms, it means that the normal situation is in a bad state, as it always is, therefore nothing unexpected. It is usually used in jest, or as a sign of frustration. The acronym is believed to have originated in the U.S. Army during World War II. – TSR


Four key risks to euro area financial stability

  • Contagion and negative feedback between the vulnerability of public finances, the financial sector and economic growth
  • Funding strains in the euro area banking sector
  • Weakening macroeconomic activity, credit risks for banks and second-round effects through a reduced credit availability in the economy
  • Imbalances of key global economies and the risk of a sharp global economic slowdown

The first key risk, arguably the most important, concerns the potential for a further intensification of contagion and the negative feedback between the vulnerability of public finances, the financial sector and economic growth…

…the vulnerability to further contagion remains highest for those countries that are perceived to exhibit a combination of vulnerable fiscal positions, weak macro-financial conditions, and the potential for further significant losses in the banking sector.

Despite several national initiatives aimed at improving fiscal fundamentals, as well as the announcement or adoption of supranational initiatives to stem stress, contagion effects have spread widely across euro area sovereigns and banks…

…the possibility that more euro area sovereigns will, as a consequence, face difficulties in refinancing their debt remains among the most pressing risks to euro area financial stability.

A second key risk concerns market funding strains in the euro area banking sector…

…a risk which has been aggravated by an abrupt rise in term funding costs in several euro area countries and significantly lower bank equity prices.

The term funding needs of the euro area financial sector remain challenging, and the situation could become more difficult…

particularly if headline risk and the market volatility associated with the fiscal and/or financial strains in the euro area persist.

A third key risk concerns an increase in credit risks for banks in conjunction with the slowdown in economic activity, and possible second-round effects through reduced credit availability in the economy…

financial stability risks stemming from the euro area non-financial corporate and household sectors have increased as a result of the deterioration of economic prospects.

Higher credit risks could be exacerbated further by the possibility of an adverse feedback loop

…whereby a restriction in credit availability prompts a deterioration in the economic outlook and in the quality of banks’ assets that, in turn, triggers an additional tightening of credit conditions.

fourth and last key risk concerns the external environment for the euro area, namely the risk of an abrupt unwinding of imbalances in key global economies that could result from a sharp global economic slowdown…

specific concerns include fiscal and economic weaknesses in
key advanced economies across the globe, and a sudden halt of private
capital flows to emerging markets

AUTHOR: Tyler Durden


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