Forget Europe… Germany’s Got Its Own Problems to Deal With

Phoenix Capital Research's picture

Every day that Germany continues to flirt with the idea of propping up Europe, is another day that the country gets closer to its own fiscal crisis.


The mainstream media believes that Germany is somehow the bastion of fiscal strength. However, even a cursory look at the facts disproves this. 


For starters, German banks post some of the highest leverage rations in Europe: higher that Italy, higher than Ireland, even higher than Greece. In fact, German banks are actually sporting leverage EQUAL to that of Lehman Brothers when it went bust.


 Source: IMF data

To make matters worse, Germany has yet to recapitalize its banks. Indeed, by the German Institute for Economic Research’s OWN admission, German banks need 147 billion Euros’ worth of new capital.


Mind you, this is just NEW capital demands. In addition to this, German banks need to roll over 40% of their total outstanding debt within the next 12 months.


This is at a time when the many European nations are relying on the ECB to insure they don’t have a failed bond auction (by the way Germany had a failed bond auction just a few weeks ago).


Suffice to say, the German banking system isn’t as rock solid as the mainstream consensus. The German government knows about this situation which is why it’s already preparing for the potential nationalization of Germany’s largest banks should things get messy.


Germany’s sovereign balance sheet isn’t a whole lot better either. Officially, Germany has a Debt to GDP ratio of 84%. However, according to Axel Weber, the most recent head of Germany’s Central Bank (he left April 2011), Germany is in fact sitting on a REAL Debt to GDP ratio of over 200%. This is Germany… with unfunded liabilities equal to over TWO times its current GDP.


What’s truly frightening about this is that Weber is most likely being conservative here. Jagadeesh Gokhale of the Cato Institute published a paper for EuroStat in 2009 claiming Germany’s unfunded liabilities were in fact closer to 418% (and that was two years ago).


This further goes with my primary view: Germany has its own problems to deal with. So the idea that Germany is somehow going to prop up the EU is not really realistic. After all, if Germany was indeed going to serve as the mega-European backstop, don’t you think it would already have done so?


The truth is this: the German constitution won’t permit the issuance of Euro bonds. And the German population/ social contract between German politicians and voters will not stand for money printing of any kind.


So… don’t bank on Germany coming to save the day. Indeed, even the option of Germany somehow taking over other EU nations budgetary controls is ridiculous as NO EU member would submit to that.


Instead, I expect Germany to duck out of the Euro in the near future. It may happen in the next few weeks or it may happen in early 2012. But considering that the Federal Reserve had to step in to save the European banking system today I believe it will be sooner rather than later.


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Olympia's picture


...the barbarians, who forced beautiful Europe to get down Zeus’“back” and made her a prostitute ...the unworthy Europeans, who in 1945 “took Europe down” from “Mount Olympus” and in 2012 relinquished “enslaved” Europe to the Phoenician loan sharks.

Germans are proved to be the easy solution to breach Europe’s door. Whoever wishes to “set foot” on Europe and demolish it, the only thing he has to do is to “fool” the Germans. For a second time in less than fifty years, Europe’s idiots become the victims of foreigners and they serve their interests at the expense of Europe...



The German traitors of Europe along with the Phoenicians from Asia may have forced Europe to get down from the "back” of the Greek “bull”, but it remains to be seen how they shall pull it through with the “bull”.



THE DORK OF CORK's picture

Impressive drop in leverage by the Irish - by my calculations it was 40 to 1 leverage during the boom years and 18 to 1 in 2010, just by using central goverment funds as a % of GNP as a metric.

I have been a lonely voice on Zero hedge for sometime saying Germany is more fucked then many other Euro countries but got little traction.

Mercantile countries suffer far more in a depression then defecit countries - especially if their exports are High value Boutique engineering goods that we can do without for 10 years.

I much prefer to have cheap wine , bread, electricity & transport living in Bordeaux then spend a cold cold Winter in Berlin.

They will have a tough time paying for their gas imports when the Asians stop buying those high powered cars. 

PS - they are shipping those fruits from Southern Spain to London via a Channel tunnel freight train for the first time.

Things are changing in Europe............. slowly but they are changing - Euro  long distance trucking is dead in the long term.

Fuh Querada's picture

For once I agree pretty much with this author's analysis with the exception that if there if anyone leaves the EUR zone it will be some sort of succession of the PIIGS and not Germany. Listen to Marc Faber's latest analysis on Bloomberg (and his newsletter is a lot more expensive than Graham's). Unfortunately there is no way to make any money at an acceptable risk/reward ratio on the basis of the analysis, free reports or no.

xela2200's picture

I thought the central banks sent a clear message to Germany with its bond auction failure. Germany hasn't gotten the message yet. I wonder what the banks will do next.

Iconoclast's picture

IMHO Germany will stay committed to the euro, there may be a split of sorts but they'll stay and the shared currency project will survive. The USA economy and banking system is the real basket case..on current trajectory the debt ceiling will need raising again in April, burning through an extra $2.1trl inside 8 months takes some doing..the USA is beyond being the elephant in the room, it's a mammoth in a matchbox..

Georgesblog's picture

It may become forget Germany, the U. S. has it's own problems. This debt addiction is referred to as "contagion", for good reason. Everyone can play the debt game, as hard as they can go. The banks are ahead of the debt curve. Nations are behind it. It's a losing end game.

Sandmann's picture

buy I cannot see the Germans doing much with pieces of underground highways or high-speed rails taken as payment of debt while they still have to pay the Spaniards for their food. No wonder Germans are scared.


The Germans (Siemens) priobably built the infrastructure. The Africans are there because the EU bought African fishing grounds for Spanish fishermen and put the West Africans out of work so they migrated. The cheap African labour allows Spain to compete with North Africa growing citrus. Spain's problem is that its Banks went mad on property development and corrupt disaaster projects. Spain has a lot of South Americans entering the Eu through the back door. It also has high youth unemployment. When VW closes down SEAT they can see what life brings.  The Germans are simply scared of being wiped out forb the third time. They have also not forgotten Jimmy Carter persuading Germany to be a "locomotive" of growth in 1975 and destroying the government of Helmut Schmidt. 


With a D-Mark German food costs would fall significantly. You also ignore The Netherlands as the major agribusiness nation which OWNS much of the Spanish production

walküre's picture

Vorsprung durch Leverage ????

Winston Smith 2009's picture

Good stuff, PCR.  Exactly in line with what Kyle Bass has been pointing out in interviews.

NanoTrader's picture

When I visited Spain a few months ago, I was surprised to find a very advanced country with frequent high speed rail service between most major cities and huge infrastructure projects, such as underground highways crossing through the middle of Madrid. Even though Spain has a high unemployment rate, you could see plenty of immigrants from South America and Eastern Europe doing all kinds of work, not to mention the Chinese bazaars at every corner. Meanwhile, the Spaniards spent their time shopping or just enjoying the outdoors in their great year-round weather. Then I discovered that most of fruits and vegetables Germans eat are imported from Spain, which has invested heavily in massive agri-business to become one of the major European suppliers of food. So, maybe Spaniards built all that with German money, buy I cannot see the Germans doing much with pieces of underground highways or high-speed rails taken as payment of debt while they still have to pay the Spaniards for their food. No wonder Germans are scared.

Winston Smith 2009's picture

"Even though Spain has a high unemployment rate, you could see plenty of immigrants from South America and Eastern Europe doing all kinds of work, not to mention the Chinese bazaars at every corner. Meanwhile, the Spaniards spent their time shopping or just enjoying the outdoors in their great year-round weather."

Spain is a socialist country and just like Greece, but unlike most of the socialist Nordic countries, they took the "free lunch without productivity" socialist route.  That is about to end.

NanoTrader's picture


Yes. That is about to end. However, my point is that the more productive Nordic countries will still depend on the lazier Southern Europeans for their food, while the Southerners now have the infrastructure and technology to be independent of the North. So my prediction is that Europe will not break because the North has more to lose than the South if they separate.

Winston Smith 2009's picture

Oh, I wasn't contradicting your point.  I was just reinforcing your point by detailing the reason behind what you saw in Spain along with its inevitable result.

NEOSERF's picture

Yes, it would seem that the kumbaya rhetoric is going to pretty quickly have to turn into every man for himself if you are a Northern nation...this fantasy of somehow supporting the Southern states which are fast going into recession without money printing is farsical.  Expect this to come to a conclusion pretty quickly after the holidays...