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The Germany/ ECB Relationship is Approaching its Breaking Point... Right As Spain Starts imploding

Phoenix Capital Research's picture




 

 

As I’ve noted in previous articles, there is a growing tension between the ECB, the central bank backstop for Europe, and Germany, the de facto sovereign EU backstop.

 

In brief, the ECB has wanted to monetize and bailout needy EU members aggressively while the inflation-phobic Germany has wanted to impose fiscal constraints as well as austerity measures (essentially fiscal sovereignty) on needy EU members in exchange for bailout funds.

 

The reason for this  difference in attitudes is political in nature: Germany has already experienced the consequence of rampant monetization (Weimar). Moreover, Germany, sees this as an opportunity to further extend its reach and political clout in Europe. So it’s used every chance it can to advance a German-lead  “political union” (German Finance Minister Wolfgang Schauble’s own choice of words).

 

In light of this, Germany has been willing to stomach the ECB’s moves because it does not want:

 

  1. To be seen as the cause of a Euro breakup
  2. To kick off a banking collapse via #1

 

However, things have recently taken a sharp turn for the worse in ECB/ German relations.  The reason? The ECB first swapped out its Greek debt exposure for bonds that would not take a haircut on the second Greek bailout… then announced that any of the losses on its PIIGS portfolio (over a quarter of its $3.8 billion balance sheet) would be rolled back onto national Central Bank shoulders (aka Germany’s Bundesbank).

 

Germany was none too pleased about this, and has taken steps to rein in the ECB’s policies:

 

Germany launches strategy to counter ECB largesse

 

The plans have major implications for monetary union, dashing hopes in Southern Europe that Germany might accept a few years of mini-boom at home to help lift the whole system off the reefs.

 

Andreas Dombret, a key board member of the Bundesbank, said the body would be given powers to check “excessive credit growth” and impose “maximum leverage ratios” to nip economic overheating in the bud.

 

The Bundesbank will be able to impose “counter-cyclical capital buffers” on lenders, and use “macro-prudential haircuts” in the securities markets. It is understood that the menu of new tools will include limits on the loan-to-value on mortgages along the lines of those used in Hong Kong and other Asian states.

 

The new framework - introduced by German government in a draft law this week - is partly inspired by the Bank of England’s new system but it also has a German twist…

 

German house prices rose 5.6pc last year after a decade of stagnation. Officials in Frankfurt are watching the property data closely, fearing that Germany may succumb to the sort of housing bubble that engulfed the Club Med bloc in the early years of EMU.

 

“The Bundesbank does not want to be blamed for making the same mistakes as central banks in Ireland and Spain where they did not address asset bubbles early enough,” said Bernhard Speyer from Deutsche Bank.

 

The German authorities are in effect preparing a form of quasi-monetary tightening to offset ECB largesse…

 

“If the eurozone is to adjust, southern countries must be able to run trade surpluses, and that means somebody else must run deficits,” said Dr Speyer.

 

One way to do that is to allow higher inflation in Germany but I don’t see any willingness in the German government to tolerate that, or to accept a current account deficit.

 

http://www.telegraph.co.uk/finance/financialcrisis/9174661/Germany-launches-strategy-to-counter-ECB-largesse.html

 

The ECB recognizes a warning shot when it sees one. Indeed, ECB President Mario Draghi knows that if inflation rises in Germany, the latter will take very serious actions, including potentially threatening to walk out of the Euro:

 

Draghi Says Inflation Risks Prevail as Economy Stabilizes

 

European Central Bank President Mario Draghi said policy makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn't plan to withdraw emergency stimulus any time soon.

 

"All the necessary tools are available to address upside risks to price stability in a firm and timely manner," Draghi told reporters in Frankfurt after the ECB held its benchmark rate at a record low of 1 percent today. At the same time, it's premature to talk about the ECB's exit strategy, Draghi said, adding that the economic outlook is subject to downside risks and inflation will remain contained in the medium term.

 

The ECB is balancing the threat of inflation in Germany, Europe's largest economy, against the need to fight the sovereign debt crisis. While nations from Greece to Spain are battling recessions and record unemployment, workers in Germany are winning some of the biggest pay increases in 20 years.

 

[ECB President Mario Draghi] declined to comment on recent wage settlements in Germany, where 2 million public service workers are set for a 6.3 percent raise over two years, according to the Ver.di union. It would be the biggest increase negotiated by the union since 1992. IG Metall, Europe's biggest labor union with about 3.6 million workers, is demanding 6.5 percent more pay.

 

http://www.bloomberg.com/news/2012-04-04/draghi-says-inflation-risks-prevail-as-economy-stabilizes.html

 

And so the ECB, like the Fed, has found its hands tied: if it continues to monetize aggressively, inflation will surge and Germany will either leave the Euro or at the very least make life very, very difficult for the ECB and those EU members asking for bailouts.

 

Which means the bailout gravy train is slowing and possibly even stopping right at the time when Spain (a REAL problem) is going to start looking for a bailout. So what do you think happens when the ECB chooses to print more and Germany threatens to pull out the Euro… OR the ECB tells Spain it can’t provide any additional funds?

 

Ka-BOOM.

 

So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

 

 

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Fri, 04/20/2012 - 02:51 | 2360434 jaanp444
jaanp444's picture

In today's surroundings of semipublic suspicion mothers day facebook status gaining and maintaining national respond to treat has transform an on-going, top management concern good status for most businesses and galactic organizations

Wed, 04/18/2012 - 20:42 | 2356784 Zero Govt
Zero Govt's picture

" Germany has already experienced the consequence of rampant monetization (Weimar)."

Yes and they're at it again aren't they Mr Summers?

You are making out the Germans "austerity" for Euro Govts budgets is apposed to the ECB printing like a Banshee Bubble Ben Bernanke

..well who has explicitly approved the ECB's recent €2 Trllion printing orgy if not the German Govt??????????????????????????

You're making out like Merkal is fiscally tighter than a virgin when in fact she and her finance Minister have had to explicitly approve the ECB being looser than a Berlin brothel in the days of Weimar... isn't that a fact Graham old chum?

Thu, 04/19/2012 - 02:46 | 2357419 Ghordius
Ghordius's picture

+1 LOL "...fiscally tighter than a virgin..." LOL - LOL

Wed, 04/18/2012 - 13:49 | 2355392 kianator
kianator's picture

Mr. Summers will be right one of these days. Timing is everything in this world.  Most of the smart money knew the housing market was going to eventually implode, but did not know the exact timing. Nobody has a crystal ball in what is going to happen as central bankers (read:  ECB) and politicians are determined to prop up the system at all cost.  But, you have to go on and live your investment life (meaning, invest accordingly with equitys until the trend changes (Fed's easy money policies change) while staying hedged with gold and other precious metals) 

You just can't be an ostrich and have your investment head in the ground fearing everything is going to fall apart.  It may or may not happen according to the scenarios Mr. Summers has illustrated in the past. But, those who have followed the advice of many of the gloom and doom posters on Zero Hedge like Mr. Summers the last few years, have lost mucho opportunity cost $$$.

Wed, 04/18/2012 - 12:54 | 2355193 q99x2
q99x2's picture

'PS. We also feature numerous other reports ALL devoted to helping you protect yourself'

Protect yourself from Billy Graham and Larry Summers.

Wed, 04/18/2012 - 12:40 | 2355192 smb12321
smb12321's picture

We should number these redundant topics - 1 (why is market going up?), 2 (Germany will leave EU), 3 / 4 /5 (Spain, Portugal, Italy imploding), 6 (US debt), 7 (FED), etc.   This would be quite productive since almost every post simply updates (with news) what everyone already knows.

Wed, 04/18/2012 - 12:28 | 2355160 vast-dom
vast-dom's picture

Graham is the most hated poster here, and for good reason.

Wed, 04/18/2012 - 12:15 | 2355130 TradingJoe
TradingJoe's picture

What will happen Graham? I'll tell ya, TPTB will use this "situation" as an excuse to print the shit out of anything moving with a ticker symbol, there is no way one can short this manipulated THING!

Stay out or stay long...I prefer to stay OUT and STACK! Try for once selling me something I DON"T KNOW!

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