The Bundesbank's in Hot Water... Will It Take the Heat or Throw the ECB Under the Bus?

Phoenix Capital Research's picture


Yesterday we discussed the political fall-out for German Chancellor Angela Merkel regarding revelations that the Bundesbank has in fact put Germany on the hook for over €2 trillion via various back-door deals.

Today we need to consider how those same revelations will impact the Bundesbank itself. Already we're seeing its head Jens Weidmann (also a policymaker at the ECB) taking a hard-liner approach to dealing

Weidmann says not ECB's job to tackle Spain's problem

Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, European Central Bank policymaker Jens Weidmann told Reuters.

Weidmann, who has led a push by some policymakers from core euro zone countries for the bank to begin planning an exit from its crisis mode, said no ECB policymakers favoured using the bank's bond-buying plan to target specific interest rates on sovereign bonds, and ECB board member Benoit Coeure was simply stating a fact by saying last week that the programme still existed.

In a wide-ranging interview, Weidmann, who turns 44 on Friday, also said he saw no reason to discuss a third LTRO, the funding instrument with which the ECB has pumped over 1 trillion euros into financial markets since late last year.

Weidmann, who is head of Germany's Bundesbank, which gives him a powerful voice on the ECB's 23-man Governing Council, spoke to Reuters against a backdrop of growing tensions in Spain, where benchmark sovereign bond yields are near the closely watched 6 percent level.

Relations between the ECB and Bundesbank have been deteriorating for some times now. Disgusted with its monetary profligacy, two Bundesbank officials Axel Weber and Jürgen Stark, resigned from the ECB last year. Since that time Weidmann and the Bundesbank have fired a warning shot across the ECB's bow.

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.

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.

And so the ECB 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.

After all, doing this would score MAJOR political points for both Merkel and Weidmann who have both come under fire for revelations that the Bundesbank has in fact put Germany on the hook for over €2 trillion via various back-door deals.

Against this backdrop, it's quite clear that the EU's banking system remains under extreme duress. Case in point, European financials have in fact wiped out all of the gains produced by LTRO 2 in just one month's time. Small wonder. When we take a big picture perspective of Europe, the entire banking system is a disaster waiting to happen.

Consider the following:

  1. According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans... the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
  2. The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
  3. The European Central Bank's (ECB) balance sheet is now nearly $4 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).
  4. Over a quarter of the ECB's balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)

So we're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

And all of this is occurring in a region of 17 different countries none of which have a great history of getting along... at a time when old political tensions are rapidly heating up.

As bad as the above points may be, they don't even come close to describing the REAL situation in Europe. Case in point, regarding leverage levels, PIMCO's Co-CIO Mohammad El-Erian (one of the most connected insiders in the financial elite) recently noted that French banks (not Greece or Spain) currently have 1-1.5% capital relative to their assets, putting them at leverage levels of nearly 100-to-1.

And that's France we're talking about: one of the alleged key backstops for the EU as a whole.


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suryamalam's picture

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shopia's picture

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SmittyinLA's picture

The German govt will take the heat as long as it's spending  OtherPeople'sMoney, don't underestimate the state's willingness and ability to screw over their own citizens to promote a political agenda.

When the German govt spends its citizen's money it isn't necessarily spending Ms Merkel's own money, she and her govt are spending OPM.

max2205's picture

This is another bag of suck article

yab yum's picture

Jack Sheet, please tell us:  who is Robert Bruschetta?

flight77's picture

2 trillion USD over back door deals???
I would appreciate some more details.

Bicycle Repairman's picture

Let the printing commence. 

And for the average German we have kabuki theatre.  White face and Lederhosen.  Start the oompa music and slap dancing.  Prozit, everyone!!!!!!!

sockratte's picture

not really 2 trillion. according to the german stake in the ecb of 27% --> 540 billions. still a nice number...

skepticCarl's picture

Graham, you lifted whole paragraphs from several of last week's articles.  Have you nothing to new to add?

ihedgemyhedges's picture

As I said yesterday, he's NEVER added anything to this board.  Just wants you to visit his site to get his click count up.........


Jack Sheet's picture

the posts are worthless. It's fun watching dudes taking it seriously though, there are many who fall for it every time. Look on the positive side - if Robert Bruschetta posted his crap this frequently you would be on permanent central nervous system meds by now.

donsluck's picture

Long US dollar while it's cheap. Hedge with silver.

falak pema's picture

Draghi is the print man; Merkel is in no man's land. When Hollande arrives she will have to go whole hog to Draghi print and expand on Eurobond basis OR opt out! 

carbonmutant's picture

Beware of Sarkozy cutting a deal with Le Pen over immigration...

falak pema's picture

nope she'll never share her bed with him; its battle to the death to control the right  wing members of parliament post-this-election, in the context of the legislative elections in June.

carbonmutant's picture

She'd do it in exchange for a couple of seats...

battle axe's picture

If the Bundesbank had the balls, they would say enough, and it looks like they might  be going in that direction...or else the German people will only get hosed even harder..

j0nx's picture

As long as the German People continue to allow it is as long as it will continue. Same for everywhere else including the US.

optimator's picture

Like they have a choice?  We don't.  But, remember 'Storming the Winter Pallace"?

j0nx's picture

There is ALWAYS a choice. I never said it would be a palatable choice. People can choose if they want to remain sheep or become the shepherds again. Either choice has consequences. I'm just stating the facts not advocating for either choice. Strictly a philosophical discussion here.

Zero Govt's picture

Quite right

People have the simple choice to continue paying taxes to the most incompetent, rotten, dysfunctional and increasingly tyranical Govt in US history or to stop paying taxes and stop funding the anarchy (and their own suppression)

the US Govt is destroying the economy and the country brick by brick, your future is draining away

so sit on your sofas, let the country go down the sewer and then moan it was everyone elses fault but your own

that's the sheeple way isn't it?

Stop Paying Your Taxes ...don't fund anarchy

Nussi34's picture

Bank run!

At current prices German savers could buy all central bank gold in the world.

Let´s organize a facebook bankrun!!!

Reptil's picture

Aaah yes, good idea, but then you'll get insane comments back like

"it's very expensive"

"I prefer my money in the bank, where it's safe"

"what's the point?"

"a bank run is dangerous, I might lose all my money, what do I pay the bills with"

etc. enough to start foaming at the mouth.

Instead.... let's do a SILVER run!
1. the buyer gets a sizeable piece of metal in his hands instead of a gram of gold (26 euros something at many dealers in Germany)

2. the impact is much greater (smaller market)

3. there's an industrial demand, so it's not like TPTB can "wait it out", they'll be forced to make a counter move, exposing their achilles heel even further

4. Silver is essential for a militairy industry, so this could be packaged/meant as a statement

5. a silver shortage would damage the EFT position on gold as well, perhaps kick enough pillars to make it fall apart.

this time round, don't hang the issue on a few "bugs" and "gurus", but spread it wide. spread it like "money" thoughout the world.

Demand payment for goods or services in physical silver.

involve anonymous, ZH, all the blogs, on finances, conspiracies, health, .. place advertisements etc. hell even put it on fucking facebook (I'm sure they'll not allow a "banner" LOL)

It doesn't have to be in secret. They know that we know that they know. etc. Who cares at this point about secrecy?

possible slogan: "Buy some money, buy silver" "Kauf dir einiges Geld, kauf mal Silber"


Tylers? Anyone? Ideas?