Greece is Now Irrelevant. Watch Spain and Germany

Phoenix Capital Research's picture

Earlier this month, Spain began “rocking” the EU boat by telling the EU it wasn’t going to meet the new EU fiscal requirements.


            Spain's sovereign thunderclap and the end of Merkel's Europe


As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).


Taking what he called a "sovereign decision", he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).


In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.


With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.

Spain ultimately acquiesced here once the EU permitted it to meet more lax requirements. However, this was a definite warning shot from a BIG PROBLEM country for the EU.

As I’ve noted before, Spain must be watching what’s happening in Greece and asking itself whether it wants to go through this whole process of negotiating for bailouts via austerity measures.


Indeed, Spain’s economy is already disastrous. Unemployment is already 20+% without any major austerity measures having been put in place. Anecdotal reports show Spain to be an absolute disaster. Spanish banks GREATLY underplay their exposure to the Spanish housing market (“officially” prices are down 20% but most likely it’s a lot more than that).


Put another way, Spain in many ways, Spain is already in as bad a shape as Greece. And it hasn’t begun any significant austerity measures yet. Having seen what austerity has done to Greece (Greek GDP shrank 6.8% in 2011 AFTER Greece received bailouts equal to 57% of its GDP), Spain is much less likely to opt for the bailout/ austerity measure program.


The significance of this is HUGE. According to the Bank of International Settlements worldwide exposure to Spain is north of $1 TRILLION with Great Britain on the hook for $51 billion, the US on the hook for $187 billion, France on the hook for $224 billion and Germany on the hook for a whopping $244 billion.

However, as I have proven in previous issues, the Bank of International Settlements’ estimates actually underestimate the true exposure EU nations pose to the financial system (for instance, the Bank of International Settlements claims German exposure to Greece is only $3.9 billion… when Germany’s Deutsche Bank alone has over 2.8 BILLION Euros’ worth of exposure to Greek debt and businesses). And Germany has TENS of other banks with exposure to Greece besides Deutsche Bank.


So it is safe to assume that global exposure to Spain is well north of $1 trillion. So if Spain chooses in any way to stage a default/ messy debt restructuring, we’re going to see:


  1. A systemic crisis that would make Lehman look like a joke
  2. The breaking up of the EU
  3. A bear market in bonds (which we have not seen in roughly 30 years)


Germany, the de facto bailout member of the EU, is most certainly aware of this Spain’s situation. Indeed, Germany is showing more and more displeasures with the ECB.


Rift Grows Between Germany's Bundesbank and ECB          


There is a rift among top-ranking officials at the ECB, and it also extends between the majority of the ECB's Governing Council and the Bundesbank. First, two leading German ECB officials -- chief economist Jürgen Stark and Bundesbank President Axel Weber -- resigned because the monetary authority was buying up sovereign bonds from Greece and Portugal. Then Weber's successor Weidmann objected to the ECB's purchase of government bonds from heavily indebted Italy.


Now, Weidmann is rebelling against the manner in which Draghi is giving European banks one new cash injection after another. Although Weidmann admits that the measures are basically correct, their conditions are "very generous," he complains -- and expresses his total opposition to this policy in the jargon of the central bankers: "This can particularly become a problem if banks are discouraged from taking action to restructure their balance sheets and strengthen their capital base.”


Last week, the conflict escalated to a new level. Weidmann complained in a letter to ECB President Draghi that the central bank was accepting increasingly lower-grade collateral in exchange for its cash injections. This poses a danger, he warned, as the central banks in the north of the euro zone are owed ever growing amounts of money by their counterparts in the south. If the euro zone broke apart, the Bundesbank would be left holding a good deal of its bad debt from so-called TARGET2 loans, which currently amount to some €500 billion ($660 billion), he warned.


This may sound somewhat technical to most laypeople, but among leading ECB officials the letter was seen as violating a taboo. TARGET2 refers to the central banks' internal payment system, which has accumulated massive imbalances during the course of the euro crisis. These inequalities aren't problematic as long as the monetary union remains intact. So far, the Bundesbank has always played down this risk. But Weidmann's about-face is a "disastrous signal," say ECB executives because, for the first time ever, the Bundesbank "is no longer ruling out a break-up of the euro zone.",1518,819255,00.html


Weidmann has every reason to be nervous about the ECB’s actions. Thanks to the ECB’s LTRO 1 and LTRO 2 schemes, the ECB’s balance sheet is now over €3 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1), Germany has a very specific concern regarding the ECB’s actions:

            ECB Balance Sheet Jumps Above €3 Trillion

The mix of bond purchases and loans has exposed the ECB and the 17 national central banks that make up the euro to losses in the event of defaults or bank failures. Last month, the ECB was forced to swap its €50 billion Greek bond portfolio for new bonds to shield the banks from potential losses in the event of any forced write-downs.

If banks that have borrowed from the ECB can't pay the money back and the collateral they have posted falls in value or becomes worthless, the ECB would be on the hook for losses. Most of these losses would be spread across national central banks according to their size, meaning Germany's Bundesbank would face the largest exposure.

I’ve noted before that Germany is preparing to leave the Euro. With Spain now openly defying the EU and the ECB shifting the potential losses from its actions onto Germany’s shoulders, the likelihood of Germany walking out of the Euro has greatly risen.

And Germany is ready to go if it needs to. Remember as I’ve noted in previous articles, Germany has just put a firewall around its banking system by re-instating its SoFFIN emergency bailout fund. As a quick refresher, the SoFFIN has:

  1. €400 billion in guarantees to prop up German banks
  2. €80 billion to help German banks recapitalize themselves
  3. The authority to let German banks dump their euro-zone government bonds.


These actions, taken in the context of the fact that Germany refuses to provide any additional capital to the EU’s EFSF mega-bailout fund, make it clear just where Germany’s priorities lie: with Germany NOT with Europe.

This situation needs to be watched VERY carefully. Greece is no longer important, you need to keep your eyes on Spain and on Germany: the former in terms of how it chooses to proceed regarding potential bailouts, the latter in terms of how it reacts to the ECB and Spain.

If Spain doesn’t opt for austerity measures in return for bailouts, the EU collapses. If Spain does opt for austerity measures in return for bailouts, it’s quite possible Germany will bail on the EU.

If either of these happen, we’re going to see a Crisis that’s worse than 2008.

If you’ve yet to take steps to prepare for this, I can show you how: my Surviving a Crisis Four Times Worse Than 2008 report is chock full of information on how to not only survive but thrive during the months to come.


Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).


Best of all, this report is 100% FREE. To pick up your copy today simply go to: and click on the OUR FREE REPORTS tab.


Best Regards,


Graham Summers



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Tic tock's picture

Germany might print if it thought that the architecture was worthwhile. The Anglo-saxon, as opposed to Germanic, mode is to use capitalism in lieu of Fuedalism. American and UK Banking is a lot more parasitic than the german model, to the current era, where GDP growth is merely inflation. Under those cirmustances, I can't see why Germany would disburse its treaury to support the puppet-state spending, when those nations will have diminshing markets for German products. She could do better if those states were not part of the EU. 

Bartanist's picture

Spain used to be a proud and powerful nation. Too bad now they just let themselves get sodomized by the EU, Germany specifically and British retirees buying their seafront.

Madrid2020's picture

Yeah,but we still get to *uck their hot daughters! British and German chicks really dig Spanish polla!

Clowns on Acid's picture

When is Spain going to do as you ascribe? You know...that whole timing thing...

YesWeKahn's picture

If spain needs 1 trillion, Bernanke will print that.

SheepDog-One's picture

Oh another 'Lehman X10 event' just like Greece wasnt....the boy who cried wolf a few hundred times too many.

Charles Wilson's picture

Can everyone just back off for a while?

They're trying to build SOCIALISM.  That's all.

They're just Agrarian Reformers.  Nationalists.

You know the story...



israhole's picture

  The author is mistaken if he thinks the progression to a Jew World Order will get waylayed by Spain. The Fed will print for the EU.

NEOSERF's picture

Perhaps they can simply load the ECB onto the carcass of the Costa Concordia and scuttle it somewhere in the Mediterranean....problem solved and $3T debt issue evaporates (or drowns)

Ayn Rand's picture

Call Corzine.  He knows how to make money evaporate.

MGA_1's picture

I think everybody knows this - the ECB and troika already have it covered.

steve from virginia's picture


Time for a euro do-over, right?

 - Suspend the euro. Reinstate the old Exchange Rate Mechanism (ERM).

  - Repudiate all dead-money debts (loans made to import fuel and debts taken on to roll over old debt). Past time to learn what the word 'risk' means.  

 - The ECB issues currency to extinguish all remaining euro-denominated debts in excess of members' GDP. If you lent, you are paid off, both loans and currency vanish. (Sorry, you lose!)

  - Debts under national GDP are re-denominated in pre-euro currencies (at pooled market rates, remember the ERM is now in force). You must NOW lend or you will lose everything (you just cannot lend to buyers of petroleum).

 - Cut the NATO budget in half, use the funds to tear down excess houses, office buildings, remove 'ghost' airports, freeways, container ports, high speed rail lines, military bases. Reinstate (horrors) supply and demand.

 - Voluntary reintroduction of the euro provided there is a real lender of last resort and a fiscal entity supported by euro-wide energy import fee, enough to increase the cost of fuel ten-times. The goal is to cut energy use (waste) by 90%.

Countries WILL make money w/ the euro not WASTE money driving in circles (bankrupting yourselves in the process).

There, fixed it.  

Gromit's picture

Spanish default may bring bear market to Spanish and Euro Bonds, but will. I think, create a stampede towards US Treasuries.

Madrid2020's picture

What planet are you people living on? There has been a wave of strong austerity measures implemented in Spain,at both the regional and national level. Politicans in the Basque Country have just lost their bodyguards,defense cuts,pharmacy cuts,cuts to unemployment benefits,hell even the King has had his budget cut for the first time in 30 years!


DoChenRollingBearing's picture

Portugal, followed by Ireland and maybe Spain.  Europe could MAYBE ring-fence that.  If ITALY goes, that´s all she wrote, FRANCE· would go, and then the tsunami washes up on our shores...

PERU is still doing OK!  Our business is moving more bearings so far this quarter than any other.


At my fringe blog, I put up an article (¨Vehicles in Peru¨) showing lots of interesting cars and other vehicles that Peru has but the USA does not.  Go have a look!  If you want the link, gmail me at my name or just be creative in using Google (not rocket science)...  I run no ads, seek no money and do not accept donations.

Carl Spackler's picture

I have been to Lima, Peru for business many times.

Gasoline is expensive, and the cars there are NOT great. 

They are tiny little pieces of tin foil, because Peru is wholly dependent on petroleum from elsewhere.

DoChenRollingBearing's picture

Much of what you say is true.  The Daewoo Ticos are tinny little POSs...  Small cars are CHEAP, very important in a place like Peru.  On the other hand, there are lots of Toyota Corollas which are very good cars and very popular in the USA as well.  HYUNDAI last year became the Number 1 seller of cars in Peru (new cars, number of cars sold).

Peru produces enough petroleum to export some, but they lack enough refining capacity to produce enough gasoline.  An engineer friend told me that Peru is looking to greatly expand its refining capacity though.

And since you have been to Lima, you probably already know about the fair number of cars there that run on natural gas, which Peru has lots of.  If they can get a big part of THEIR fleet running natural gas, why can´t we?

DoChenRollingBearing's picture

gmail me at my name or use our old friend Google (it´s not hard).  As a relatively new blogger, I worry about spammers and other Computer Monsters out there...

vast-dom's picture

If one only knew the true extent of Spain's toxic housing assets as not disclosed in bank shadow books....

j0nx's picture

Don't worry, be happy. The central planners have all of this well under control. They have managed to keep things going this long. There will always be another stick save available to those who make the rules. You might need to get another job to pay for your food and gas but life will go on.

ChitownTrader's picture

If you honestly think that Germany and France are on the hook for $500 bil and they will not print/shit/create money out of nothing then you are a fool. Understand that there is too much to lose here. The world as a whole is printing money at a rate never seen before. The world will not end, maybe if hp starts making printers that print money they can revive their business.

Watson's picture

Sorry, but I do not agree that Germany will print.

Germany is still racked with guilt over Hitler/WW2 (even though in far past for current voters).
There were other very unpleasant dictators in that period (eg Stalin), but Hitler was *voted in* by the people, and that is not forgotten.

So excuses are looked for, and the only one that half-works is that the inflation of Weimar destroyed the middle classes, a natural stabilising group.

So Germany will never permit inflation while there is a memory of Hitler.
So Germany will not print.

If push comes to shove, Germany will leave the Eurozone.

Uchtdorf's picture

I never get how some ZHers hold up Germany as the last bastion of fiscal conservatism in Europe. What is their sovereign debt to GDP ratio? Get it now? Germany already HAS printed. They're gonna print some more.

Max Hunter's picture

I wouldn't sink so much into the "Hitler" connection.  But know this, Germany will not go down with the ship.. They don't deserve to, and will will refuse to.. If this cannot be saved, as many contend, you can be certain, Germany is waiting for the best time for GERMANY to exit, not the best time for the EU or the US.  I will applaud it when it happens.. The northern EU countries will form a currency if there is any shared currency at all in another 5 years..

KickIce's picture

I agree they will print until they can't but with all the legislation being passed I think they are preparing to transition from soft tyranny (debt) to full blown tyranny.  The power that has been granted to Obama in just the last few months is beyond astonishing.

Currency is Debt's picture

Very true and to the point. It is now a giant ponzi scheme help up by new issuance/printing. The ponzis will do fine, the rest....?

I will be the first also to purchase one of those HPs. Dont usually get the newest gadgets and technologies right away.

Non Passaran's picture

Good point about HP - maybe that's why they combined their PC and printer division: there's a huge CB market for an integrated CTRL+P solution :-)

rajonmestra's picture

Well that is one way to look at it. If they did combined both their PC and printer department, I do hope to see a very reliable PC and printer from them that is surely a user friendly too. Well I am not saying that their previous products are not since I am still happy with my hp remanufactured cartridge from, well I'm just saying, that's all.