The Scariest Number Revealed Today: $1.114 Trillion In Eurozone Bad Debt

As we previously reported, the ECB's latest stress test was once again patently flawed from the start. Why? Because as we noted earlier, in its most draconian, "adverse" scenario, the ECB simply refused to contemplate the possibility of deflation. And here's why. Buried deep in the report, on page 75 of 178, is the following revelation which contains in it the scariest number presented to the public today.

Due to the fact that on average banks' internal definitions were less conservative than the simplified EBA approach, the application of the simplified approach led to an increase in NPE stock of €54.6 billion from €743.1 billion to €797.7 billion. The CFR and the projection of findings led to an additional increase in NPE of €81.3 billion, resulting in a total increase €135.9 billion to €879.1 billion of post-CFR NPEs across the participating banks as a result of the AQR. The impact of the application of the EBA simplified approach and the credit file review on the stock of NPEs varied amongst debtor geographies, with overall increases among SSM debtor geographies ranging from 7% to 116%.

Translated: due to a lotta ins, lotta outs, lotta what-have-you's, and the now traditional "fluidity" when it comes to European term definitions (recall that as of this year, in Europe hookers and blow contribute to (estimated) GDP otherwise the Eurozone would be in deep triple-dip recession, if not outright depression by now) the stress test, while concluding that Europe's banks are "safe", also uncovered some €136 billion in previously undisclosed NPE or "Non-Performing Exposure", aka Bad Loans - loans which will never be repaid.

Which in turn leads to the new bad loan total amount (that will also in the coming quarters be revised sharply higher) among Eurozone banks: a whopping €879 billion, or some $1.114 trillion at today's exchange rate. This amount to a stunning 9% of the the Eurozone's GDP and is precisely the reason why the ECB can't possibly even conceive of deflation, as without the much needed rising prices to inflate away this NPL debt tumor, Europe's banks are all insolvent, regardless of what today's stress test may have revealed about just a paltry 25 of them.

And then there is the question of what is the real NPLs number. If the ECB, which clearly is happy to goalseek data to fit the optimistic, "confidence-building" narrative was willing to admit that there was a massive 18% delta in European bank NPLs based just on what definition one uses to define these, as it concluded that banks are largely safe, one wonders: is the real bad debt number €2 trillion, €3 trillion, or even more, and is the ECB's sudden attention shift to the total outstanding NPLs what should be the take home message from toda, and also explains why Mario Draghi is suddenly rushing to inflate bank reserves by another €1 trillion: a number which would almost perfectly offset the negative impact of some €880 billion in bad debt.

Finally, the €64 trillion question: how long until the ECB begins monetizing secured debt on European bank balance sheets. After all, for everyone in Germany the ECB is already Europe's "bad bank." Why not end the pretense, and do away with the facade of prudent monetary policy, and admit what everyone knows: before all is said and done, and Europe implodes in a bad debt singularity, the ECB will, with 100% certainty, monetize the Eurozone's bad loans?