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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Good Investing!

 

Graham Summers

 

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