Chart of the day: Debt deflation in the eurozone periphery

Just to follow up on the last post, which was relatively optimistic about the eurozone, I want to show you this chart of non-performing loans in the periphery. I believe it tells a story of debt deflation and explain why the contraction in GDP has been so sharp.

Non-performing loans in the periphery

I believe the improving second derivative numbers will put a halt to this and turn these numbers around. We are already seeing some signs of this in Spain. In Portugal, the bad loans keep rising though. Italy is where the rubber meets the road because it is the third largest eurozone economy. Arresting incipient debt deflation in Italy has to be a primary concern for Europe.

Taking the foot off the austerity brake, even somewhat, is going to be a big change for Italy, especially since it is no longer in the excessive deficit camp. I expect improving numbers both on economic data and on bank data. If the NPLs do not improve in Spain or Italy despite the relaxation of targets, we are going to have problems.

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