Berlin Pushing For European Bankruptcy Framework With Provision For State Sovereignty Give Up

Tyler Durden's picture

The big news out of Europe this morning, and the reason for the drag on the euro is an article in Der Spiegel, "Merkel's rules for bankruptcy" according to which Germany is now actively (and very secretly) pushing for a plan outlining a set of insolvency rules, which would require that private investors bear a portion of the rescue burden, and much more importantly, would see at least a partial give up in state sovereignty, where a new insolvency trustee (the "Berlin Club", which we fail to see at least for now, how it differs from the Paris Club) would take implicit control over and override a default nation's treasury, in essence pushing the bankrupt country into a form of Feudal vassal state-cum-reparations subservience. Welcome to financial warfare in the post-globalization period.

From Spiegel:

The first national bankruptcy on European soil in decades was only prevented because the remaining countries in the euro zone came to the aid of their faltering fellow member with billions in loans and loan guarantees. The chancellor, determined not to allow the Greek debacle to be repeated elsewhere, proposed the establishment of a procedure to ensure "orderly national bankruptcies." The German chancellor hoped that the plan would create "an important incentive for the euro-zone members to keep their budgets under control."

Finance Minister Wolfgang Schäuble, in complete agreement with Merkel, said: "We have to think about how, in an extreme situation, member states could become insolvent in an orderly fashion without threatening the euro zone as a whole."

The main reason for the initiative is, of course, Germany's taxpayers' increasing dissatisfaction with the growing financial burden they are forced to shoulder as more and more European countries succumb under the need to resort to a bailout of some sort:

The effort is necessary, because important safety measures to protect the common currency are not working. The Stability and Growth Pact, which was intended to nip excessive government borrowing in the bud, proved to be largely worthless. Some of the monetary union's ironclad principles were ignored, including a rule that prohibits member states from coming to the aid of others in financial difficulties. It was only with political tricks of questionable legitimacy that the euro-zone countries managed to ward off the crisis in the short term, but by no means has it been overcome. German taxpayers, in particular, could face enormous burdens if the current measures fail. Under the provisions of the bailout package, Germany has pledged up to €170 billion.

With her plans for orderly national bankruptcies, Merkel intends to eliminate these vulnerabilities within the monetary union. She hopes to install a procedure under which a bankrupt country could be restructured in the future. She also wants to prevent the rescue program from becoming a permanent fixture in the future and, as a result, a chronic threat to the German federal budget.

The reason why this new "resolution" approach has not gained a much broader mainstream media coverage is that Merkel, afraid it may send a wrong vote of no confidence signal to the European bail out plan, is working under strict secrecy:

Despite the urgency of the problem, the German government must take a cautious approach. The chancellor is worried that her deliberations could be seen as a vote of no confidence in the European bailout package, which is why she is treating the plans with such secrecy. Less than a dozen experts from various parts of the government are even familiar with the matter.

Her goal is to structure the plans as a further development of, rather than an alternative to the bailout package. Work on the project has already made a lot of progress. A concept based on preliminary work carried out by the Finance and Justice Ministries is already being circulated at the Chancellery.

If the plans are implemented, banks and investors will not be the only ones bearing the burden when countries in the euro zone encounter financial difficulties. The debt-ridden countries themselves will also have to make substantial sacrifices, and their governments will cede some of their power. The experts propose a two-step procedure. In describing the goals of this approach, Schäuble says: "Whenever a company files for bankruptcy, the creditors must relinquish a portion of their claims. The same should apply in cases of national bankruptcy."

So the next logical question once a country enters into bankruptcy mode, is who will be the trustee? Merkel already has a plan for that too - the Berlin Club.

A newly established Berlin Club would serve as the "international guarantor." The German government experts see this organization as an "apolitical and legally independent entity."

The plans build on existing institutions involved in international debt settlement. While the Paris Club regulates debt restructuring among nations, the London Club specializes in liabilities between banks and countries.

The German government hopes to bridge a gap with its proposal. The Berlin Club would concentrate on government bonds and the associated derivative securities. The members of the club could be recruited from within the G-20 group of industrial and emerging nations. Another possibility would be to establish the club within the framework of the euro zone.

The International Monetary Fund (IMF) would be involved in the debt refinancing from the outset. The German experts see the IMF playing a key role. If representatives of the Washington-based organization determine that debt forgiveness and restructuring have failed, then the second phase of the procedure kicks in.

Yet the main reason why this plan is sure to be met with howls of protest is that as a result of Berlin Club intervention, the insolvent government would become a de facto vassal state of the Berlin Club and its power interests.

It amounts to a complete refinancing. According to the concept, "this will require restrictions on sovereign discretionary powers." In other words, the government of the affected country would no longer be able to fully dispose of its own treasury.

It would be replaced with "an individual or group of individuals familiar with the regional characteristics of the debtor nation," which would safeguard the financial interests of the bankrupt country. The Berlin Club would have the authority to appoint these individuals.

The concept toughens the stance, particularly toward creditors, but also toward the debt-ridden country. If it is implemented, it will amount to an institutionalized disempowerment of a debtor nation's government by the IMF and the new Berlin Club, at least in its final stage. This prospect alone could have a disciplining effect on overspending governments.

But the concepts would also represent an imposition on international donors. Until now, conventional bailout programs like the one devised for Greece have been based primarily on the notion that a cash-strapped government receives public funds from other countries, while private donors are not asked to waive their claims. To put it simply, taxpayers in countries with reasonably healthy government finances, particularly Germany, have taken the place of banks and private investors that have extricated themselves from ailing economies. This would no longer be the case in the future.

The growing rift between Europe's core and periphery will be critical to observe, and as the Spiegel speculates, is sure to further strain relations between Germany and the currently insolvent nations:

Countries immediately or potentially threatened by insolvency, like Greece, Portugal and Spain, will be up in arms against the proposals from Berlin. Why should they agree to rules that would make it easier for the remaining euro countries to deny them aid in an emergency?

But the German government is determined not to be the paymaster for Europe's debt transgressors in the long term. Officials at the Chancellery and Finance Ministry fear that otherwise the German public's support for the euro and the EU would be undermined.

In developing their scenarios, the government experts assume that other potential donor countries share their concerns. The governments of France, Finland and the Netherlands are likely to be just as interested in private creditors and debtor nations bearing a portion of the burden.

As more and more nations in Europe succumb to the inevitable collapse of their overindebted economies, and with austerity sure to prevent a pick up in economic growth, will the only possible outcome soon be a return to Feudal europe where the less developed hinterlands become gradually subsumed by the wealthier core, and in which a certain percentage of all sovereign debt issues are immediately channeled back to the Berlin Club members? Is "insolvency reparations" going to be the 21st century equivalent event that triggered the reparation-driven toxic spiral in Weimar Germany culminating with hyperinflation and World War 2? If so, look for much more fireworks out of Europe as soon as the summer doldrums pass. And, as always, any abnormally tightening European sovereign CDS should be actively purchased on any dip - the real fun is only just starting.

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Young's picture

Or it was just a short covering DCB before... But what do I know, I don't have a phd...

Zina's picture

Will Greece go bankrupt? Ask Paul, the Octopus.

Young's picture

Hmm, he's been picking 'em right, but does he have a phd?

Mad Max's picture

As Germany knows well, nothing harmful could possibly come from subjugating a state's finances and forcing it to bankrupt itself and its people to pay foreigners.

I see nothing at all wrong with this approach.  Just bunny rabbits and rainbow-farting unicorns.

hedgeless_horseman's picture

Like the man said, "Welcome to financial warfare in the post-globalization period."


Amish Hacker's picture

Especially since the same kind of strategy worked so well in the US: subjugate the public's finances and force us to bankrupt ourselves in order to pay off losing bets made by the banks.

Augustus's picture

It is not the losing bets made by the banks that are the problem.  It is the guy down the street who bought more house than he could pay for, expecting some bank to lend him more money to make the payment.  That little oinker is the target of the bailout and why FNM and FRE and FHA will continue to lose money as long as possible.  generally, the banks have repaid the money that they got from the US Govt. to stop the run.

traderjoe's picture

They repaid the money using FDIC backed debt guarantees/subsidies, massive interest rate spreads, unlimited borrowing at the FED, regulatory forbearance, making money from Fed's QE program (who do you think sold them all of those mortgages), continued FNM, FRE support, refinancing activity through low interest rates, mortgage modification support, etc. 

Sure the little guy was involved, but the banks made money going in ... and then coming out. The taxpayer is more than a little bit sore...

Lux Fiat's picture

My thoughts exactly.  The potential similarities, in reverse, to post WWI Germany, are a bit eerie.  That didn't end well.  Let's hope that whatever direction this goes, that the outcome is much better for the citizens of all of the countries involved.

knukles's picture

Undoubtedly sounding. 

Has it never dawned upon these folk, that a debt is debt is debt.  If for example, America as we are doing now de-leverages the private sector, whilst the public sector re-leverages, it changes naught, for it is a mere transfer from one pocket to the other.  The American private sector (Ultimately the public who in the final result pays all taxes.) represents the productive economy which pays tribute, er excuse me, taxes, to the public sector to service the public sector debt.

Just ask any head of household how this works when the kids and spouse run up the credit card.  Du-f-ing-h.

So Angela my dearest, the idea is bankrupt (Oppps, a pun!) from the very start, for another layer of administration likewise continuing to derive its resources from the same subjects (those paying the taxes) effectively does naught but enhance global warming through production of additional smoke, mirrors and hot air.

No wonder so few are hated so much by so many.

Noah Vail's picture

Its a circle-jerk, isn't it? Who are the major bond holders that are to take a haircut? The banks, eh? So all that this accomplishes is transfer bailouts from the EU as a whole to whatever nation's banks that hold the debt. Of course, this is likely much more politically palletable in Germany for her to bail out her banks, than Greece. Like the man said, a debt is a debt, and when it defaults its just a question of who's ass it comes out of. Musical chairs and hot potatoes. In the end, its the public that suffers regardless of who gets tagged for it.

traderjoe's picture

And who buys the debt of the bailout fund when all of the lenders are taking haircuts?

This plan was utterly stupid from the beginning. Solving too much debt with more debt? No one has any money left to really bail anyone out with EQUITY. It's only a matter of time...

mephisto's picture

Ah yes. Re-invading the Ruhr also helped the situation. Lets pick Greek islands. Also I've just been to Barcelona, loved it. I pay my taxes, can I have that?

LeBalance's picture

Deutschland uber Alles!

Pure conquest by the Holy Roman Empire.

Problem Reaction Solution.

An Enslaved Euro-Zone.

(too funny)

Just wait for the NAU.

Oh how will they do it.


MichiganMilitiaMan's picture

It seems that this would loosely coorespond to Ben Bernanke receiving conservatorship of California, Illinois, New York, Arizona, Michigan et. al. if any of these state fail.  How likely would that be after GM, Chrysler and other TBTF bailouts?

Ragnarok's picture

I think the desired effect for insolvent nations is, i) never ask for help and self enforce strict austerity measures ii)Get insolvent nations to leave the EU voluntarily rather than be kicked out.

Running on Empty's picture

It took exactly 65 years after WW II ended for the Germans to win, how incredibly patient of them.

Lux Fiat's picture

Interesting that the Germans still have a seemingly collective phobia of debt after what they went through, but most in the US have long forgotten the lessons of the 1930s. 

Of course, we have generally not had potentially hostile countries at our doorstep over the past 65 years either.  But still. 

I remember as a kid being regaled with stories of the Great Depression by my grandparents, who got married shortly before it begain, and hung onto their farm only because they had no debt.  The wariness of debt has lasted for 3 generations in our family, and I'm working hard to make sure that it sinks into the 4th.

Boilermaker's picture

Germans, yes, are mostly debt free (aside from thier auto and mortgage debts which are outrageous).  That's primarily because they don't use credit cards, per se.  Their banks allow 'negative credit' based on your income.  It's quite common for a German to have a negative balance on their bank account which incurs interest much like an American style credit card.  But, the German government, on the other hand, spends like a drunken sailor which, in turn, causes perpetual new taxation on the people.

So, Germans are personally debt free (mostly) but, as a people, are leveraged to their eyeballs just like Americans.



Lux Fiat's picture

Thanks for the insights.  Lived in Germany for a while, but it's been a while.

desgust's picture


And if you can't pay your mortgage you are insolvent for seven years and the bank is entitled to take your income money up to a life minimum. And that for seven years. and no, you cannot walk away!

Boilermaker's picture

I know that they actually repossess your shit there also.  Not just cars and homes.  They'll come and yank up your carpet and take your furniture and everything.

The credit system itself is different though. They don't monitor how much open credit and obligations you have.  They only report if you've made a late payment or are in default.  The don't have credit histories like we do here.  In other words, no credit history (an empty file) is the goal as it means you haven't defaulted or been late.  It's a wierd discussion with my wife and German friends that the only way to get credit here is to have credit or have had credit.

I actually don't know how easy it is to get credit there though.  Everything is based on your income and not your history.


Boilermaker's picture

Won?  Won what?  I'm married to a German immigrant (lawful permanent resident) and am in Germany often.  I don't know what they won.  They have a 60% payroll tax rate, 19% VAT, a pair of levi's costs about $120, they eat cold cuts on a roll everynight for dinner, they have dorm sized appliances, a one car family is the rule because they cost so damn much, $8 per gallon of gasoline, etc.

I don't understand the love-fest for Europe and, specifically, Germany.  The US has loads...err..TONS of problems but it's way way way better than Europe.  Our quality of life is still significantly better than Europe.  Also, the debt-per-capita is well above what it is in the US (which is even more pathetic than our own debt levels).

Debate what you will, but I know Germans and Germany.  It's not a rat hole, for sure, but it's no paradise either.  Most, if not all, of the Germans that I know and are friends with are more skeptical of their own politicians than even I am of ours.  It's the same broken system over there just a different flavor.

seventree's picture

I don't doubt the typical American family has a bigger house, bigger appliances, and more cars than their German counterpart. But which is more likely to see stability or even improvements in the next few years, vs. sudden collapse into forced 'austerity?'

Boilermaker's picture

Americans absolutely have bigger and more of everything, in the middle class.  I'm not chest thumping but that's the truth, even if it's 'unfair'.  That isn't to say that Germans don't have a good life.  Clearly, they do.  But, they do not have what we have.  Everything, and I mean everything, is ridiculously expensive there.  Alot of it has to do with their lack of access to major shopping venues.  You're still buying from a Mom & Pop store where the mark-ups are huge (they have to to survive).

I've been to Germany over 60 times in past decade.  It's a nice place to visit but I wouldn't (personally) want to live there.

desgust's picture

You are spot on. Life in Germany isn't easy. Our politicians are banksters' puppets and our media is a bag of lies. Merkel is an elitist, a zionist and a war monger. I know nobody who trusts her. It's as bad as everywhere. Chemtrails, bad expensive healthcare, dictatorship in many  regards (food supplements for example). When importing any from the US they would open your package and CONFISCATE whatever they want (Vit D3!!!). Severance paid when you lose your job -  taxes up to 45%!

Nice, isn't it?

mephisto's picture

And given that was just an attempt to win WW1, they've been very focussed for almost a century.

This currency union thing was a plan of true evil genius. Get what you wanted originally without millions of lives lost, as a bonus you dont piss the russians off - as long as you leave serbia alone they will just find it funny.

So much more modern. So 21st century.

bullandbearwise's picture

Free condos for vacationing Germans as far as the eye can see...

snowball777's picture

Amusing that Americans can hurl poo at these kind of 'arrangements' in Zooropa with a straight face after Bretton Woods.

Boilermaker's picture

What about after the Marshall Plan?  Oh, yea, that little thing.  We'd like a refund.

MarketTruth's picture

Hmm... are the Warburgs looking to take control of the EU in full as the Rothschilds have in the UK? Anyone? Anyone?

M.B. Drapier's picture

I think the EU needs intra-EU capital controls which will a) prohibit excessive lending (public or private) across member-state borders and b) firmly establish that in the event the rules are broken and excessive lending happens anyway, leading to a credit crisis, the cross-border lenders are left holding the bag for the illegal lending. At least now the German government couldn't dismiss such a proposal as too radical!

Running on Empty's picture


"Even though large tracts of Europe and many old and famous States have fallen or may fall into the grip of the Gestapo and all the odious apparatus of Nazi rule, we shall not flag or fail.

We shall go on to the end, we shall fight in France,
we shall fight on the seas and oceans,
we shall fight with growing confidence and growing strength in the air, we shall defend our Island, whatever the cost may be,
we shall fight on the beaches,
we shall fight on the landing grounds,
we shall fight in the fields and in the streets,
we shall fight in the hills;
we shall never surrender, and even if, which I do not for a moment believe, this Island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on the struggle, until, in God's good time, the New World, with all its power and might, steps forth to the rescue and the liberation of the old."


Old hatred's never surrender to time.

Muir's picture

"But the concepts would also represent an imposition on international donors. Until now, conventional bailout programs like the one devised for Greece have been based primarily on the notion that a cash-strapped government receives public funds from other countries, while private donors are not asked to waive their claims."



And there you have the last 2 years of U.S. History in a nutshell.

Which I have been clamoring about as the first thing that should be addressed ahead of unions or anything else.


MarketFox's picture

German money does what German's says it does....

Why should it be any other way ?

ie....Greece is not Germany's child....

Just another BIG reason that blanket type currencies are a failed concept....

EURO to 89 cents and lower....or out of existance....

Just another academic experiment gone awry....

And the IMF wants a "world currency" ?

Not in a million years.....and if so...NFL....not for long....

The exception ?

That the average public citizen of one country likes the idea of being taxed for the benefit of another country....

And when is this ?



jkruffin's picture

If Spain, Greece, and Portugal keep whining, they will soon become Germans.  WW2 revisited, as they just take over their countries, first financially, then as the PIIGS try to fight back, force will be used.

Tartarus's picture

This just indicates that despite all the wet dreams from euroskeptics the crisis in the EU nations will not result in its breakup. The eurocrats will not allow the EU to fail and will instead seize the opportunity to greatly expand their power.

taraxias's picture

Au contraire mon capitane, this indicates precisely the opposite. The breakup of the EU social/economic experiment is now within eye-sight. 

Tartarus's picture

You're commenting on an economics blog so I will presume you understand economics, but we are talking about geopolitics here and you eating up the crap spewed by the MSM indicates you have very little grasp of that field. Indeed, all the doomsaying plays right into the hands of people advocating for a more tightly-controlled European Union. No doubt they are tacitly encouraging dire predictions by the media because such predictions make it far easier to convince people there is a need for dire solutions. The reality is abandoning the euro or breaking up the EU will create the opposite of any desired effect plunging the countries of Europe into a much deeper and more catastrophic depression than what they already face. I won't rule out a country leaving or attempting to leave, but the Hell that will quickly rain down on them will insure not only that said country returns to the fold, but anyone else who entertained the notion will put it as far out of their minds as possible.

DrLamer's picture

The Euro is non-existent currency of non-existent country. "Euro" country does not have a Constitution. No Constitution - no country. No country - no government. No government - no central bank. No central bank - no currency.
This "euro currency" is a fake, backed by nothing, by nobody's promise, by nobody's word.
Sounds slightly heretical, but this is the only way the money system can be built.
The dollar and the (u)SA at least do have a Constitution..... or ... do they ??

jmc8888's picture

Queen's done this before, see WWI and WWII.  Germany should be careful, they'll get the blame by the less soverign people for the entire British system's fraudulent debts. 

That and give them someone big on their soil that might need a bailout screwing them over. 

Now to get out of the fraudulent debt it costs you your treasury.  Europeans are dumbasses if they don't protest this.

Bet the euro's wish they could revisit the Lisbon now.  Or got their heads out of their asses the first time.  Sadly we're on the same fate, as ours too is firmly between our cheeks. 

It seems they already got the power, or believe enough to try, only the probable corrupt courts can save them, if the people will not voice their concerns.

Meanwhile, such a system by it's very nature, shows austerity will be a major flavor, like the only one, of ice cream you can get for(ever?) in the forseeable future in Europe. 

Europe on a country basis will be a land of have's and have not's. Sad. 

Then the focus comes back the good ol USA.  So far the euro banksters are batting 1.000 in getting their stuff passed.  Let's see if they can hold out in a market collapse.


Lighty's picture

It is not clear to me how "orderly insolvency" and the euro as we know it now will co-exist. A 2-tier euro at least would be required, unless Germany wants bear a 70%+ depreciation of his own currency.

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