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EFSF: Germany's Plan Is Sovereign Default NOT Bailout

Tyler Durden's picture





 

Following up on our earlier observations on the Spiegel article about Germany change in posture vis-a-vis the European Stability Fund, here are some additional very critical observations from Thermidor:

There have been rumors in the market for a couple of weeks that the German Finance Ministry has been working on a Plan B for the EU bailout and now Der Spiegel is carrying the story (below). I think this will come a big shock to the market, which I believe has assumed that while we were lacking detail, the broad thrust of how the EFSF would be utilised was agreed i.e. that countries like Spain unable to role their own debt would turn to the fund that would in turn raise the money in the collective name of the EU. However, I’m been told that in reality the details of how the EFSF will work are still highly fluid and will remain so until a member is forced to draw on the funds.

With that in mind German officials seem to have made their move and are pushing what amounts to a bank bailout/sovereign default plan on the lines of what we have seen in places like Argentina rather than a straight sovereign bailout. Bottom line: private creditors would face substantial haircuts on their holdings.  Indeed, Der Spiegel is suggesting 50% and I believe these sort of numbers make sense, although the exact details would be worked out by a “Berlin Club”, which itself would be based on the Paris Club. That would leave the EFSF to be used by various national countries to bailout their own banks with exposures to the defaulting nation, which I’m sure would be far more palatable to the German electorate.

Why the hell are the Germans willing to upset the apple cart at this stage? Well it appears there are two clear motives. The first is a fear that the existing bailout package, which domestically is seen as ‘hard working German taxpayers bailing out lazy Greeks’ is immensely unpopular and hence potentially carries both a high fiscal as well as political cost for Merkel. Secondly and perhaps more importantly the Germans realise that the existing plan by not reducing the debt burden of the debtor nation doesn’t improve their competitiveness or solve the problem. What happens in 2013 when the EFSF runs out and Greeks have a debt to GDP of 150% to roll? Default and restructuring are the only options

Once again, the Spiegel article can be found here.

 


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Mon, 07/12/2010 - 11:41 | Link to Comment Minyan Vince
Minyan Vince's picture

"Default and restructuring are the only options"...they usually are to too much debt being un-servicable by the obligor!

Mon, 07/12/2010 - 11:49 | Link to Comment Cursive
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Why the hell are the Germans willing to upset the apple cart at this stage? Well it appears there are two clear motives.

Either the Germans upset it now, at a significantly lower cost, or reality will upset it later, at a significantly higher cost.  

Mon, 07/12/2010 - 11:52 | Link to Comment Mitchman
Mitchman's picture

+1.  First, the Germans have 170 billion very good reasons for doing so.  I remember the Jeffrey Sachs/Hugh Hendry debate where even Sachs said that in 2015 (2013?) Greece should be able to"service" its debt.  That is not a long-term solution.  That is just perpetuating the problem without putting any heat on the Greeks.  

Today's plan is just kicking the can down the road.  So good for Germany for bringing things to a head today.

Mon, 07/12/2010 - 15:32 | Link to Comment fajensen
fajensen's picture

And - If they can kick the proverbial can into the balls of Sarkozy, they get triple the score too.

The Germans have not forgotten that the French negotiated the Greek bailout behind Germany's back while Merkel was visiting the funerals of the Polish government and only low-level German minions were available.

Mon, 07/12/2010 - 20:34 | Link to Comment Buck Johnson
Buck Johnson's picture

Spot on, they know where this is leading and don't want to end up at the destination.  They know that Greece and Portugal and Spain are to far in the hole to be able to roll this debt over.  So they are coming out and saying essentially it's time to bite the bullet.  Better to do it know and take the hits than wait a few more years and have an uncontrolled meltdown.  I'm willing to bet anything that Germany is thinking about going back to their own currency instead of the Euro.

Mon, 07/12/2010 - 11:55 | Link to Comment LMAO
LMAO's picture

Hear, hear

 

LMAO

Mon, 07/12/2010 - 12:04 | Link to Comment Cheyenne
Cheyenne's picture

Bingo. Germany seems to be the only country that occasionally "thinks" like an actual human being.

Mon, 07/12/2010 - 12:16 | Link to Comment mach777
mach777's picture

..and why is that? It seems the old money doesn't have Germany in its pocket entirely.

Expect a smear campaign as things begin to heat up.

 

Mon, 07/12/2010 - 12:47 | Link to Comment trav7777
trav7777's picture

Reinhard?

Mon, 07/12/2010 - 11:53 | Link to Comment thesapein
thesapein's picture

Yes, please, try to avoid civil unrest in Germany. Learn from the past.

Mon, 07/12/2010 - 11:53 | Link to Comment Goldenballs
Goldenballs's picture

So much for European unity then.Sooner the UK comes out the better.The UK Government dare not give the UK a referendum on membership because they know what the answer will be and it scares them to death.Let the Greeks default and it,ll be cheap holidays all round then.

Mon, 07/12/2010 - 11:54 | Link to Comment Ragnarok
Ragnarok's picture

Default and restructuring

 

Music to my ears.

Mon, 07/12/2010 - 11:57 | Link to Comment perei26080
perei26080's picture

Don't forget stress tests next friday 23rd.  Awesome that that stress tests come BEFORE the countries involved have even begun talking to one another about potential haircuts.  It's like "today you take a final exam on number theory, but next month I will give you the text book so you can learn about it after you get graded on material you have no idea about."

Mon, 07/12/2010 - 11:58 | Link to Comment buzzsaw99
buzzsaw99's picture

...which domestically is seen as ‘hard working German taxpayers bailing out lazy Greeks’ is immensely unpopular...

They are domestically stupid if they believe that. Bailouts always and everywhere go to the irresponsible banksters. German and French banksters are screwing over the euro-sheeple just like the maggots here do to us. Love the propaganda tho...

Mon, 07/12/2010 - 12:13 | Link to Comment Boilermaker
Boilermaker's picture

Actually, think of it, in a way, as people in Texas bailing out flaky jamba-juice sucking Californians.  Same concept which would also be highly unpopular.

But, yea, the European banksters are formed from the same pile of shit as the yankee breed.

Mon, 07/12/2010 - 12:39 | Link to Comment George the baby...
George the baby crusher's picture

But, yea, the European banksters are formed from the same pile of shit as the yankee breed.

These banksters are not just of the same breed, they are the same.


Mon, 07/12/2010 - 13:47 | Link to Comment DosZap
DosZap's picture

Boilermaker,

"But, yea, the European banksters are formed from the same pile of shit as the yankee breed."

Where do you think the SYSTEM came from to begin with...........LOL

The Founders ran from that Vampire like SOB's.......

Mon, 07/12/2010 - 11:58 | Link to Comment carbonmutant
carbonmutant's picture

 Germans don't want to be fall guy for a "

Culture Of Corruption".

Merkel was drafting a law for "Orderly insolvencies" back in May.

 

Mon, 07/12/2010 - 12:36 | Link to Comment Amish Hacker
Amish Hacker's picture

The difference is that Merkel may actually follow that law. We didn't. We already had plenty of provisions for orderly bankruptcy (eg Chapter 7, Chapter 11), and if they had been followed, what would have happened? Bank depositors would have been made whole by FDIC guarantees. Busted bets and bad assets would have been written down (and, yes, bond holders would have taken a haircut). The managers who had made so many incredibly stupid, over-leveraged bets would be bagging groceries at Safeway. The remaining good assets would have passed into the hands of smarter, more productive management and been reallocated into more sensible investments. But none of that happened. Instead, we were told by the losers, "Give us 700 billion dollars by the day after tomorrow or the entire universe will implode," and we went along with it! 

And now we argue with Merkel when she says that orderly bankruptcies are the proper way to deal with sovereign defaults also?

Mon, 07/12/2010 - 12:44 | Link to Comment kaiserhoff
kaiserhoff's picture

Exactly, and all of that still has to happen anyway.  The real estate is still overvalued.  The banks are still broke, and nothing in Baldy Ben's pea brain will solve that. 

This is not so much extend and pretend.  It's more lie and deny.

Mon, 07/12/2010 - 13:57 | Link to Comment DosZap
DosZap's picture

Amish,

""Give us 700 billion dollars by the day after tomorrow or the entire universe will implode," and we went along with it! "

 

If I remember correctly, Bush said it was going DOWN, and ONE man had the authority to spend it anyway he wanted.NO questions asked.

And, WE did not get a choice...........PERIOD.

Come to think of it, have ANY of US had a vote in this shit?.

NO.

IF this is the 700 your speaking of...............

Mon, 07/12/2010 - 12:03 | Link to Comment hound dog vigilante
hound dog vigilante's picture

"...perhaps more importantly the Germans realise that the existing plan by not reducing the debt burden of the debtor nation doesn’t improve their competitiveness or solve the problem. What happens in 2013 when the EFSF runs out and Greeks have a debt to GDP of 150% to roll? Default and restructuring are the only options."

 

Germans = smart.

Americans = stupid.

 

So refreshing to see a country (DE) deal with reality like responsible adults.  Thank you, Germany.

 

Mon, 07/12/2010 - 14:35 | Link to Comment DosZap
DosZap's picture

hound dog,

Germans = smart.

Americans = stupid

You assume that the US Pwrs That B, are doing this,not understanding, this is exactly what they WANT to do.

It IS.............their Agenda, cannot believe more cannot read this, esp here.

Mon, 07/12/2010 - 12:04 | Link to Comment Gunther
Gunther's picture

Spiegel is a a German news magazine with a small English website.

In the German Website I did not find the same article; neither a hint that it was translated by someone.

Is this intended to be kept out of the news?

 

Mon, 07/12/2010 - 12:55 | Link to Comment M.B. Drapier
M.B. Drapier's picture

Good question. Spiegel is, after all, known for having a translation policy that's not always editorially inert.

Here's a related question: who's leaking this stuff to them, and what is the leaker's agenda? I'd assume it was an "official" leak, but if Merkel really is trying to keep the preparations secret then presumably that can't be the case. At a wild guess I'd say that it's disaffected Bundesbank people; they seem to have been using Der Spiegel as their mouthpiece lately. Since they evidently hate the Greek bailout, they may be seizing this opportunity to burn Merkel's boats for her.

Mon, 07/12/2010 - 12:07 | Link to Comment b_thunder
b_thunder's picture

2010  Europe:   "Bottom line: private debtors would face substantial haircuts on their holdings."

2010 In the USA:   Stress Test, Fannie/Freddie bondholder bailout, bank bailout.

 

2015 Europe:   Developed world

2015 USA:  3rd world country

 

Mon, 07/12/2010 - 15:40 | Link to Comment dpr10
dpr10's picture

so EU will be developed world by defaulting::))there is no easy way out, there will be no EU..

Mon, 07/12/2010 - 12:10 | Link to Comment kaiserhoff
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First we take Manhattan, then we take Berlin.

                            Leonard Cohen

 

Or maybe vice versa?

Mon, 07/12/2010 - 12:23 | Link to Comment Goldenballs
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Has anybody really thought about the long term implications for the EU of all this.The PIGS are just the start of the breakup and mass unemployment in the fatherland has always spelled trouble.Monetary Union was always a pipe dream held by Eurocrats in Brussels and Strasbourg the truth is now these characters have too much power and make decisions based on their unreal visions and fantasies,they should fall on their swords for the current state of the EU.It dosen,t really matter what happens with the deficits because in the long term if  working people in the PIGS descend into poverty and have nothing to loose they will hit the streets and then the markets will force the pace of change.In short if things go downhill faster than the politicians and markets expect and can cope with,the breakup of the EU will become inevitable.

Mon, 07/12/2010 - 12:31 | Link to Comment VK
VK's picture

Bravo Germany! They didn't have a housing bubble, have a 20pc plus savings rate, the low euro has really boosted their economy, unemployment is falling. If the DM still existed, it would be the best currency in the world. A very sensible people and Merkel is light years ahead of other western leaders. Default and restructuring is the way to go. The only stupid entity in Germany is Deutsche Bank with huge leverage which is really unfortunate as that'll drag their system through the muck albeit less muckiness.

Mon, 07/12/2010 - 18:56 | Link to Comment traderjoe
traderjoe's picture

A strong DM would hurt their export machine. Sometimes I wonder if they want to drift the Euro lower, but of course not implode it. Don't personally think a soft landing is possible.

Mon, 07/12/2010 - 12:34 | Link to Comment themosmitsos
themosmitsos's picture

I'm Greek nd I FULLY support this....this was the purpose of creating & entering EU for many states....imposition of outside (French & German) fiscal discipline to the European nations that lacked either political will or intestinal fortitude to do so themselves. yay! :)))

Mon, 07/12/2010 - 19:55 | Link to Comment Arius
Arius's picture

f... deutchland

Mon, 07/12/2010 - 12:33 | Link to Comment TonyV
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From the Article:

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."

There is no way that most of the european governments will agree to that. Chances are that they would rather exit eurozone than agree to foreign bankers running their affairs.

Mon, 07/12/2010 - 12:43 | Link to Comment Zeroexperience2010
Zeroexperience2010's picture

They have ceded already so much to the EU, not sure they will mind. They will probably sell it to their electorate as 'it has been agreed at EU level' 'nothing can really be done about it' 'it's for the greater good of Europe' ... the usual.

 

 

Mon, 07/12/2010 - 12:52 | Link to Comment suteibu
suteibu's picture

It's a win/win for Germany all around.  Either they shield themselves from another country's default or they exit the EU (or it contracts).

Mon, 07/12/2010 - 15:27 | Link to Comment fajensen
fajensen's picture

There is no way that most of the european governments will agree to that. Chances are that they would rather exit eurozone than agree to foreign bankers running their affairs

No, they will do anything and agree to anything as long as they get a cut of the Loot!!

Mon, 07/12/2010 - 13:56 | Link to Comment M.B. Drapier
M.B. Drapier's picture

Adapting the EFSF for this purpose has an obvious problem, though. It's possible that German voters feel better about bailing out German banks than bailing out Greece, though I wouldn't take it for granted. It's unlikely they feel better about bailing out French banks than bailing out Greece, but that is what will happen if the pooled EFSF money is doled out on an at-need basis to European banks. It's very likely that Germany will be a net contributor to a pan-European bank bailout, and very likely that the German voters will notice this.

And, on the other hand, ringfencing each country's own bank-bailout money - which would be quite contrary to the purpose of the EFSF - would be hazardous. What if, as is more than likely, one or more Eurozone countries (other than Greece) can't afford to bail out its own banks unassisted in the aftermath of a Greek haircut?

Finally, surely it's impossible to follow the EFSF without also keeping an eye on the actions of the ECB/Eurosystem, and /vice versa/. What role will the Eurosystem have - continue to have, that is - in moving money to distressed countries under the table?

Mon, 07/12/2010 - 13:51 | Link to Comment RossInvestor
RossInvestor's picture

Tyler, instead of "foreign debtors" it should be "foreign creditors" who take the 50% haircut on their holdings.  The sentence does not make sense otherwise.

Mon, 07/12/2010 - 13:53 | Link to Comment Dismal Scientist
Dismal Scientist's picture

I find the above hero worship of Germany hilarious. Lets be more clear, German politicians are beginning to make sensible statements re bond holders taking a haircut, spurred by righteous electoral outrage at the thought of paying for the profligate southern Europeans.

German banks, of which Deutsche is by a country mile the best, were some of the biggest suckers around when it came to buying subprime CDOs in 2006, 2007. Lets not forget IKB, HRX, WestLB, BayernLB. Some were heavily bailed out, some are dead, just like their Wall Street equivalents.

Those that are left, plus the insurance companies, own bucket loads of bonds that are worth less than stated. Merkel is doing a good job here of crunching her own financial framework. Bring it on...

 

Mon, 07/12/2010 - 14:00 | Link to Comment M.B. Drapier
M.B. Drapier's picture

Merkel is doing a good job here of crunching her own financial framework.

Well, that's one thing that isn't clear. It's very likely that the plan is to move to bailing out German banks with Greek debt directly, as opposed to bailing them out by propping up Greece.

Mon, 07/12/2010 - 14:06 | Link to Comment Dismal Scientist
Dismal Scientist's picture

Its not the Greek debt which is the problem, its Spain. Have a look at the exposure of the likes of Eurohypo (bought by Commerzbank at the top, of course) to lending to the Spanish construction market. The exposure and therefore writedown risk is substantially higher. Sure, its in state hands now, but much of the Landesbanken and their owners, the Sparkassen (Germany's equivalent of the Cajas) are not. Not yet, anyway. Someone will have to pay for the lending follies of the German banks, and I don't think Merkel is going to be able to sell that one to the taxpayer so easily...

Mon, 07/12/2010 - 14:28 | Link to Comment M.B. Drapier
M.B. Drapier's picture

Oh, sure. Spain, Ireland, the whole pork barbecue. My point (and Thermidor's) is that Merkel may be thinking of changing her response from concealed to direct bailouts for German lenders. I entirely agree that this Plan B may not work so well either.

Mon, 07/12/2010 - 17:35 | Link to Comment Dismal Scientist
Dismal Scientist's picture

Merkel wants influence over terms of the bailout/restructuring, and changing the parameters to direct bailout of German banks rather than concealed, may be her electorate facing next move.
Its irrelevant though in the context of toxic waste still in the German system; and by pushing for private debt holders to take a haircut, she is going down a very dangerous road for her own financial players. A change in her political stance will frighten the French though, so all's well

Mon, 07/12/2010 - 14:01 | Link to Comment zaknick
zaknick's picture

DEFAULT BITCHEZ!!!!

Mon, 07/12/2010 - 14:15 | Link to Comment MrTrader
MrTrader's picture

Like usually "Der Spiegel" is reporting about worst case scenarios every properly planing government has to conduct. Yawn.

Mon, 07/12/2010 - 19:10 | Link to Comment traderjoe
traderjoe's picture

Not sure your agenda, and thought this was a good time to enter my 2 cents, but the takeaway for me of the article is that terms are not set - which means when the SHTF (soon) there will be no consensus and probably therefore no bailout.

Even the CB's and FinMins understand that this bailout fund never made sense. Just like a CDO, you cannot pool a bunch of BBB's and call them AAA's. And then the SIV needs to go into the market (presumably during a crisis) and sell the bonds to actually fund the bailout. The ECB could buy the bonds, or make the (insolvent) banks do so. You're simply just offering up a new 'guarantor' to borrow from the same market participants who by now will want out.

It's nothing but a flat out Ponzi scheme (as is the entire fractional reserve system).

Mon, 07/12/2010 - 15:06 | Link to Comment BurningFuld
BurningFuld's picture

Isn't letting/making Greece default exactly what Greece wants? They still keep the Euro?? So the bigger the haircut the happier the Greeks are! Or do they get the big Euro boot? There really isn't any other way when to talk default is there?

Mon, 07/12/2010 - 15:45 | Link to Comment dpr10
dpr10's picture

if you default and stay in the system, then everyone defaults...this makes no sense whatsoever, they can dance around it, but the only way is the inevitable collapse of the EU..

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