Mohamed El-Erian On Germany's Lose-Lose Position

Tyler Durden's picture

Germany in a lose-lose situation,
Posted in the FT and soon to appear in PIMCO's website

Germany. It goes to Thursday’s two-day European summit in Brussels in a
visible lose-lose situation, and with no easy way out of a complex
dilemma that pits good politics against bad economics. Its hard-fought
economic gains, earned over many years through restructuring and fiscal
discipline, are threatened by the crisis in peripheral eurozone economies
that adopted a different policy approach. To add to the irony, these
challenged countries (and indeed the zone as a whole) now look to
Germany to fund one rescue package after another.
Up to now,
Germany has co-operated. It has been the biggest contributor to the
bail-outs for Greece and Ireland. It has also supported the European Central Bank’s decisions to buy peripheral government bonds,
and to provide unlimited liquidity to struggling banks. In doing so
Germany has sought to buy time for the weaker members (and European
banks) to get their houses in order – as well as to reduce pressure on
the integrity of the zone as a whole.

course Germany’s support has not been unconditional. It has insisted on
serious policy corrections from profligate peripheral European
countries. It has also pushed for a sovereign debt resolution mechanism that,
starting in 2013, would ensure that the burden of adjustment is not
carried just by taxpayers but also by creditors and shareholders. And it
has resisted multiple calls to stimulate its internal demand and thus
act as an economic locomotive for the eurozone as a whole.

problem is that this approach – centred on dealing with liquidity
problems now and solvency issues later – is not working. On Wednesday,
credit ratings agency Moody’s threatened further to downgrade Spanish government bonds,
because of problems associated with raising funds in 2011, along with
difficulties with its banks. More generally, rather than being reassured
by the provision of liquidity to peripheral countries, existing
depositors and creditors have used the rescue funds to exit their
holdings. Meanwhile, new money remains sidelined by concerns about these
countries’ debt overhang and their lack of competitiveness.

investment in peripheral Europe means fewer jobs and deeper economic
contractions, making it even harder to deliver austerity plans that are
already contributing to social unrest, including Wedneday’s disturbances in Athens.
So the pressures on Germany to do more are rising. In the last week,
Germany has been called upon to back even more ambitious bailout
initiatives, with proposals to create a unified European bond
and double the size of the emergency funding facility for peripheral
countries. In the process, the country also finds itself in a growing
standoff with an ECB that now wants to limit the weakening of its own
balance sheet.

Sensing the risk that Germany’s balance sheet (and
that of the ECB) may continue to be contaminated by someone else’s
problems, the markets have started to signal some initial concerns about
the country’s fiscal robustness. In addition to some jitters at a
recent government bond auction, German interest rates have followed
American ones sharply higher even though the two countries’ fiscal paths
diverge dramatically.

All this highlights the dilemma facing a
Germany that feels politically compelled to support a liquidity approach
for peripheral Europe’s solvency problem, but knows the economics of
the situation are wrong and, ultimately, harmful. A liquidity approach
that delays the day of reckoning may be good regional politics, but its
bad economics. It does not restore sustainable growth to the periphery,
and it exposes the core to contamination – be it through peripheral
liabilities being transferred to the German tax payer or the ECB’s
balance sheet coping with by purchases and repos of peripheral bonds.

is not the first time that Germany faces such a dilemma. After the fall
of the Berlin wall, West Germany judged that good politics trumped bad
economics, and agreed to reunify with much-weaker East Germany at a
one-to-one exchange rate. It took years to overcome the costs of this

The situation this time suggests good economics should
play a greater role. Rather than simply doubling up on a faltering
liquidity approach, the time has come for Germany to lead a more
holistic solution focused on addressing the periphery’s debt overhang
and competitiveness problems.

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Turd Ferguson's picture

Sorry to jump in with spam but I think I have something to add here:

erik's picture

Doesn't the economic recovery potentially bode ill for gold and silver?  Part of that price is the fear of instability right?  If more people start believing we have a true recovery on our hands, that could put pressure on gold and silver.

I'm not saying this is a true economic recovery of course, not until the crutches are removed and the patient is still standing.

Turd Ferguson's picture

erik, I don't think that the "economic recovery" of which you speak will ever be strong enough to generate enough tax revenue to allow us to avoid QE to infinity. In that case, the value of the dollar continues to drain away and PM prices continue higher.

erik's picture

i agree that tax revenue will be a critical determinant.  i am speaking more on a medium-term timeframe though (~3-6 months).  all signs point to higher gold and silver except "economic recovery".  i am just wondering aloud if that is a strong enough headwind to delay gold and silver from going higher.

Turd Ferguson's picture

Again, erik, it depends on the level of "recovery". I just don't see it. Not with unemployment pushing 10%.

Also, as if on cue, the long bond has fallen off a cliff again. Never doubt "Poseidon's Anchor"!

Mercury's picture

The Euro stays afloat to the extent that Germany is willing to take up the slack.  I don't see how it can be otherwise -or how they could have things both ways- and I was surprised to see them pretend so in their announcement last week with the French. I'm still hopeful Merkel will be tough about this in the end and do what's best for Germans.

goldmiddelfinger's picture

I though all El-Arian cared about was the NY Jets. He spends 5 minutes each and every CNBC appearance with Jokin Jow Kernan on the idee fixe

goldmiddelfinger's picture

I though all El-Arian cared about was the NY Jets. He spends 5 minutes each and every CNBC appearance with Jokin Jow Kernan on the idee fixe

oogs66's picture

From november 30th posting...nothing has really changed, but did mention BIG PIGS way back then :)


If you kick a can down the road long enough, you eventually reach an intersection or a dead end.  I can't help but picture a child kicking a can down a quaint dirt road.  Its a peaceful and nice image.  Now that same kid seems caught in an intersection, and not just any intersection, but where two 4-lane roads cross.  During rush hour.  With no traffic lights!  Imagery aside, the attempt to bailout Ireland has thrown two concepts into the spotlight.                                                                                                                                                                                     First and foremost is the contagion risk.  This isn't new.  We saw it with U.S. banks and have been fighting it on the sovereign side for the past 9 months.  PIIGS is at risk of becoming BIG PIGS, as not only are Spain and Portugal in the spotlight, but Italy and even Belgium are gaining some notoriety.  I put in 'G' twice since Greece is already back renegotiating their prior bailout, but who knows, at this rate, the 'G' could eventually be Germany as they continue to take on the obligations of other countries.                                                                                                                  The second issue is that for the first time we have a recipient that doesn't seem to want the bailout.  Ireland seems extremely reluctant to take the money.  There is a real movement growing to just take the pain.  I think their anger at bankers may be clouding their judgement and making this option appear better than it is, but I do believe its the right option.  The austerity plan is more of a fiction than my new year's resolutions.  Sure, they sound great, but what's the realistic chance of any of this occuring?  ZERO!  So the recipients are becoming more reluctant to live with the consequences of bailouts and are starting to seriously contemplate just dealing with it.  Since politicians have finite terms maybe they are more willing to deal with it than corporate CEO's who have huge upside from kicking the can down the road.  Its an interesting development to watch.  I can't imagine Greece isn't thinking about ditching the whole plan.                                                                                                                                  The countries providing the bailouts are also getting tired, and possibly scared.  To me its clear that Germany in particular is realizing that one potential end game is for all the bailouts to eventually drag them down.  They are caught in a dangerous situation.  They have played the 'loaded bazooka' game and tried to make the capital markets blink and lend to the weaker countries.  Well, the capital markets have done their work and realized its not safe to lend to some of these countries.  Now Germany is trying to figure out how to make people lend money without having to take risk themselves.  Very tricky and unlikely to work out.  As the street realizes that the big countries don't want to bailout the little ones, we will see continued pressure on sovereign debt.  I'm still amazed that the U.S. contribution to the bailout hasn't hit the mainstream news.  I'm less amazed it hasn't hit CNBC as facts would interfere with their cheerleading.                                                                                                                        The media has dubbed this a European Debt Crisis.  Really, its just a continuation of the debt crisis that started in the U.S.  Too many people borrowed too much money.  Everyone relied on either income or assets going up to repay the debt, or that someone would just roll the debt over at maturity.  It started with U.S. sub-prime borrowers.  It has worked its way up to prime borrowers, smaller banks (the number of FDIC takeovers continues to grow) and weaker countries.  It had hit big banks but that seemed to have been resolved.  Its starting to hit bigger countries - Spain and Ireland.  There is some concern its starting to hit municipalities.  What scares me more than anything, is that the problem of borrowing too much spreads beyond those currently mentioned.  Can France, or Germany, or even the U.S., run into trouble?  Not likely right now, but it would be foolish and arrogant for those countries to proceed as though they are immune from the consequences of too much debt and not enough income.                                                                                                                                                           The mantra of decoupling is coming through loud and clear.  Every stock bull is mentioning the good economic data.  This week has a lot of economic releases.  IF the economic data doesn't come in strong, the market seems very susceptible to a sell-off.  It seems to me that most people are back to being long, have bought the recent dip, and are buying into the argument that European debt issues will be contained.  I think its unlikely that they remain contained and that if I'm right and the market is long, we are due for a continued pull back.                                                                                                                                                          

THE DORK OF CORK's picture

It makes no sense to me that the ECB has not revalued its and Euro treasury Gold at this point.

States can never be truely bankrupt if they have non debt assets on their balance sheet.

They need to break with Americas fiat policey , recognize their losses on the Euro periphery and concentrate wealth at the core by revaluing Gold.

France, Germany and Italy can retain the balance of wealth in the Euro zone and yet not require highly destructive interest reparations on the periphery.

Although De Gaulle must have been spinning in his grave when France sold 500 tons , I can't imagine Paris not having control over the remainder.

The only thing stopping them must be the true nature of Germany's Gold which may be only paper credits built up during the post war period.

Its a bitch being a loser ... twice and now three times.

These Huns are overrated.

qussl3's picture

Wouldn't it fuvking hilarious if all the gold on CB books had been loaned out already and sold to GLD, or left the vaults etc?

So much so that the people now own the gold and not govts?

Too bad jack booted thugs would follow in pretty short order tho.

Ragnarok's picture

This is an issue I wish was explored more on ZH.  Anglo-American gold interest vs. European.

Rotwang's picture

Or you could go here and have a look.

Some of those Euro (zone) countries look fairly heavy on gold.

THE DORK OF CORK's picture

If you assume that the euro area can back up its cash with Gold reserves (it could do this before the recent run up in Euro gold price) then it would have to multiply the euro gold by price 6X to cover the entire M1 supply which covers cash and overnight deposits.

so we may be talking a 5000 Euro Gold price to back up its M1 money supply

Am I grossly wrong in these calculations ?



si_tab02_03 - 2.3 Monetary statistics 1) C1 Monetary aggregates 1 my assumptions.

  correction - I was grossly wrong in my assumptions.

Given that there is 790 Billion euros in circulation as of Oct 2010 and if the eurozone total Gold reserves are a total of 347,163,000 troy ounces then at 1000 euro a ounce that is much less then half the total cash value in the euro system as for M1 then................

Rotwang's picture

Not a totally bad coverage ratio.

It varies from country to country however. Some are 'heavy' (close to 70%), and reserves are revalued every 3 months.

Here's the country break down.


THE DORK OF CORK's picture

Remember M0 is the cash in circulation - Gold backing should at least cover overnight deposits.

Found this guy on Seeking Alpha




The ECB hyper inflated housing all over the Eur ozone - they cannot drain this money out of the system - they are bullshitting to infinity.

Hochreiter: If the Euro Were Backed by Gold, One Ounce Would g

my own calculations where you divide the total gold into the total M1 gives a gold price of 13.5 thousand euro a ounce !


qussl3's picture

>Sounds like someone is trying to scare up demand for the crap he's holding.

hambone's picture

BTW - I'm in Germany this week and this nor any economic concerns are on the minds of Germans.  They are feeling very confident and from all I've spoken to have no worries or trepidation around supporting the Euro.

They also have no real idea what's happening but people are people.

DavidRicardo's picture

Lose-lose for Germany is win-win for Mellonesque liquidation.  Think it over.

Best Satan in Town's picture

I've seen your posts around the site and it's fascinating stuff. Only you and another dude on the internet named John Ryskamp ever mention Mellonesque liquidation. Do you think you could explain how Mellonesque liquidation works exactly? I know that it's the slow withdrawal of government from society, but not the withdrawal of bureaucracy or power.

Anarchist's picture

The German elite have the identical end game goal as their counterparts in the EU, Britain and the US. The standard of living for 90% of the West's population is going to be forced down and social programs and pensions will be slashed and unions weakend. The rise of the developing world will force the developed world's middle class to dissapear.

The German elite had another major goal to achieve before those goals could be accomplished. They wanted to re-absorb East Germany with the profits made from the rest of the EU. Adopting the Euro made this possible. Germany would not have been able to sell the goods required to do this under the old DM.

The German elite have been forced to temporaily prop up the Euro zone to maintain profits. When it becomes clear the Euro is headed for a wall they will drop it like used condom. The German elite will then trigger the destruction of the standard of living of the German middle class.  


TruthInSunshine's picture

PIMPCO just might get run over by a reindeer.

erik's picture

The SPY will re-trace 50% of the top to bottom intra-day move at 124.57.  If you believe a correction is coming this could be a good entry point.  Of course, you'll be fighting the end of day ramps that we've so often seen.

(added) and it didn't quite make it there, which sets up the usual buy into the close expectation.  the stair step down continues in the SPY.

hambone's picture

Off topic - but the sell off in T's coincided w/ the passage of the tax bill in Senate.  Coincidence...I think not. 

10yr @ somebody over there trying to tell some Fed somewhere stop?

erik's picture

austerity will be forced on the US, not done by choice it appears.  it'll be interesting to see how the economic recovery versus higher interest rates tug of war affects housing.

Canucklehead's picture

Germany's hestiation simply brings the United States closer to the table.  Expect the United States and Germany to trade places shortly as the US taxpayer sits down to the table to play the hand dealt to Germany.

Germany will become a spectator and watch how the hand is played.  They can always take a seat at the table at a later time.  Who would deny them?  The Greeks?  The Belgians? The Irish?  et al?

In for a penny, in for a pound...

johny2's picture

Pimco is right but the germany is the least of its problems...Even with FED, Japan, China buying load of the USA treasuries in the past one month or so, they are free falling..

DavidRicardo's picture

Give me a break!  PIMCO made a bad bond bet.  Drop dead.

crosey's picture

This is all a passing-the-time game.

At a prescribed time, the distinguished Bilderberg Group will execute a planned restructuring of the global corporation, to their liking.

Play while you can.

dcb's picture

this guy drives me nuts, he spends more time saying nothing. he offers no plan, gives no hard numbers,

this whole crisis has been one sham of attempting to fix solvency issues as a liquidity problem and hope the issue goes away before the person in office leaves so he/she can keep their ill gotten gains. I call the whole crisis one big wealth transfer mechanism

Anarchist's picture

person in office?

The politicians are just tools for the elite and always have been. The average person is nothing but cattle to be used as the elite see fit.

The limited resources in the world and the invention of nukes have limited the developed worlds ability to continue the looting of the third world and force them to live a lower standard of living. Many of the elite in the developed countries understand things will change and have cut deals to allow the developing countries to raise the standard of living of their people. The middle classes in the developing world will be forced to live on less.