ECB Back In The Market To Prevent Sovereign Bond Rout

Tyler Durden's picture

Like yesterday when just before 10 am we had a big gap down in PIIGS bonds, represented in this case by Italy's BTPs, only to be followed by ECB buying of peripherals, so today, same time, same place, the ECB gets involved to prevent yet another market rout, this time amplified by the fact that one can not longer short PIIGS using CDS and shorting cash bonds is the only option. Alas, as the chart below demonstrates, as yesterday the ECB intervention merely delayed the downward price trajectory of Italian bonds, so today we expect the same result. In the meantime, ECB buying has driven the EURUSD, and thus the ES higher, however briefly.

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AbelCatalyst's picture


Here's the Black Swan!


I've mentioned this one other time on ZH, so I apologize if this is a repeat. 


The following “Black Swan” theory is quite plausible, yet, very few have really discussed it because it feels too “out there,” which makes it the perfect Black Swan event. 


The Black Swan Theory:  Germany is about to go back to the Mark and there are overwhelmingly compelling reasons for Germany to do so:


1.  Germany has a ton of debt, close to 80% of GDP, which they can inflate away without experiencing the chaos of hyperinflation.


As in the US and most developed countries, the only way the debt is going away is either by default or inflation.  Germany has a very unique opportunity as they can inflate away their debt and not experience the consequences of hyperinflation.  Think about this for a moment.  If Germany drops out of the Euro, then that currency goes into a death spiral while the Mark increases in value.  All of their debt is in Euros so they can say bye-bye to their mountain of debt almost immediately.  This is a unique opportunity for Germany at a very critical moment in time.  It may not be wise to underestimate the power of self preservation.  This is why German continues to appear to play nice, but is doing absolutely nothing (see German Endgame below). 


2.  Germany is deathly afraid of hyperinflation, but knows it needs inflation to wipe out it’s debt


As with almost every other developed country, inflation is needed, but the consequences are severe and civil unrest would surly follow.  Most countries are between a rock and a hard place – no painless solution exists.  However, Germany has the perfect solution looking them in the face.  They can experience all the benefits of hyperinflation, while pushing the pain onto their neighbors.  Again, this is a situation that is unique only to Germany because they are singlehandedly holding up the Euro while having all their debt in Euros.  The pull to go back to the Mark must feel incredibly tempting, and I’m not sure they can resist.


3.  Germany MUST keep their AAA rating


If Germany stays with the Euro they will lose their AAA rating, and their current debt will become totally unmanageable (just like every other developed nation).  The difference is Germany has the unique opportunity to print Marks and inflate their debt away with virtually no negative consequences.    


4.  The benefit of being in the Euro is quickly coming to a close.


Germany has been the number one beneficiary of the Euro as they let PIIGS nations borrow at low rates to buy their exports.  While Germany’s exports and economy has done well, the catalyst for growth has been debt.  This is the same for all developed, debtor nations; however, Germany has a very unique exit strategy.  As it relates to this theory, many of the benefits to being in the Euro is quickly diminishing, which makes Germany’s exit from the Euro far more compelling at the present time.    


The Endgame for Germany


The Endgame is easy for Germany.  The Euro needs to fall apart before they can make their move so they’re just sitting back and waiting patiently for the opportunity.  If Greece goes bankrupt and the dominoes begin to fall, watch for Germany to go back to the Mark.      


The strategy is obvious:  Germany simply appears to be supporting the Euro as aggressively as possible without taking any actual action.  Does this sound familiar?  Float roomers, suck up to the French, agree to bailouts as long as there is a long list of strings, have their high court subtly undermine Germany’s participation in bailouts, and sit back and wait for the collapse.   It’s important to understand that it is in Germany’s best interest for the Euro to fall apart because they will end up with the strongest currency with virtually no debt. 


I’m not sure why people have not seen this, but it seems fairly obvious.  Each country will ultimately act in their own best interest when the SHTF and this will be the best option for Germany – is there any doubt?  What country in such a unique situation would not do the same?  Do you think the US would do this if presented with the opportunity?  You bet they would!     


If you look at all the evidence through the lens of this Black Swan Theory, then all the recent actions (or lack thereof) begin to make perfect sense!  And as a final note, a recent very credible source said that Germany is already in the process of printing Marks!


Ghordius's picture

This is, in a nutshell, the way the Germans would behave if they were not Germans.

So this swan is white instead of black.

In November you might see how the Germans really behave in a crisis and you might be flabbergasted.


Re. the article, yes, the ECB is doing what a "grown up" Central Bank should do. Still on my white book. Good job, Trichet!

AngryGerman's picture

the problem is just that with having the strongest currency, we can say goodbye to our exports

EL INDIO's picture

Not really. Germany has been making expensive, good quality products for a long time and it has always found people that desire and buy those products. A Mercedes will always be expensive no matter what currency the Germans use.

AngryGerman's picture

but when something is expensive in your currency, it does not mean that it's also valuable in my currency. and even although they probably can source raw materials cheaply with a strong mark, you still have face then ridiculous production costs as most production takes place in germany.

Ghordius's picture

if true, then explain why mercedes sells in India

the "comparative advantage" of a softer currency is only a quick relief drugfix - NeoKeynesian Propaganda at it's worst

qussl3's picture

Frankly, i rather pay more for German or Japanese products than save on Chinese crap that will have to be replaced later.


AngryGerman's picture

go buy chinese so you ll die earlier and dont have to be around when the shit really starts stinking

EL INDIO's picture

Not an outrageous theory, certainly worth contemplating.

I was in France not long ago and at some point I bought train tickets and some other things. In the receipts, the price in EURO was printed and below it in old Francs (for reference it said)!

So may be, even France is preparing for that too.

AngryGerman's picture

that's just bc the French are stupid.

and don't expect a state enterprise to be able to be prepareed in time. of the laziest, they are the most laziest...

Ghordius's picture

it's because in the EuroZone Senior Citizens like to have the "old" price

last time in France was when the Franc dropped two zeros and the Seniors still talked about 10'000 old francs instead of 100 francs

Gief Gold Plox's picture

@El indio

About having the prices written down in old school currencies, there is a very simple explanation for it. All across the EU it was mandatory to keep both values for a while as to permit the public to get used to the new EUR value. Once that period expired, plain old-fashioned human laziness took over as POS software developers (I was one for a long time) never take the time to remove the old-school currency from the system. It's too much work that noone requires and I'd venture to say will not be removed until made illegal.


Belarus's picture

@Abel, Kyle Bass is with you. I suspect ultimately the same thing. Germany's not going to sit around and backstop the slovenly countries that will do nothing but drain the coffers right out of Gernans. Germans are not going to let that happen. 

AngryGerman's picture

oh yes they will. the endgame is to prepare a pan-european financial and monetray regulation under our supervision.

think about it:

1. Germans companies rely on exports, so they need countries that have no economy

2. These must be in the same currency, as otherwise the value you can extract from other economies get raped by excxhange rate

3. The only way to keep the Euro is dictate econmic policies of all European countries.

4. This will cost huge sums of money, but that is taxpayers/future generations i.e. debt money.

5. voila: taxpayers fund demand for german exports, german firms ct. business as usual, owners get rich, rest of germany slowly bleeds out

ownership of german companies is highly concentrated, remember.

rest of europe, esp piigs, are just tools.

qussl3's picture

Good points.

It appears i made the mistake of confusing Germany Inc with Germans.


Ghordius's picture

Dear AngryGerman

why are you so Angry and so "German"? and why is your avatar so hypnotizing?

now seriously, why do you think the Germans have exports? Do you imagine a Central Planning Committee that orders it?

Alvaro de Esteban's picture

We have  had "credible rumours" of printing Marks since two years ago.

I agree tha coming back to DM in unilateral way could be OK for Germany.

But  I don´t beleive that, EURO was the prize to pay  for german reunificatión, and the logistics of printing marks are nearly impossible to keep in secret.

If DM returns I think it won´t be as surprise, the other Euo membres will have to be warned in order to have at least 10 days of bank holidays

Manipulism's picture

Since 2010 the German Euro is printed in Belgium and France not any longer with the Bundesdruckerei, which ist state owned.

They sourced it out because...?

Maybe they need the Bundesdruckerei to print the new mark.

YesWeKahn's picture

That doesn't work for Germany. They need a relative cheaper currency to boost export. Coming back to Mark doesn't help that.

Overflow-admin's picture

What's your credible source saying Germany is already in the process of printing Marks???

trav7777's picture

unfortunately for them, this would annihilate their banking sector...and bankers have lobby dollars to bribe with

DavidC's picture

Black Swans are by definition unexpected, therefore for you to coming out with this theory (which I agree is a valid one) then it is NOT a Black Swan event.


AbelCatalyst's picture

Excellent point!  Maybe just a dark white one?!  

Ostapuk Ivano's picture

So AK-47 or Ar-15?


topcallingtroll's picture

Omg dont get that one started again!

trav7777's picture

neither.  762Nato if you rely on a rifle as your primary weapon.  If you have fire support behind you, such as tanks, m203s, javelins, F16s, and MQ9s and whatnot, sure, an underpowered jammatic carbine like the AR15 will work just fine.

The teams that frequently operate outside the umbrella of this fire support pyramid have uparmed to 7.62N after experiencing the limitations of the lesser calibres.

pendragon's picture

what is so idiotic is that the status quo = eurusd going higher or the arse is falling out of it. why can't there be something in between where we get a gradual weakening...seems far more logical as a weaker euro is the endgame anyway?

Boston's picture

Despite the ECB interventions, the Italian 10 year is nevertheless steadily creeping back up to 6.0%.

After it slices above 6.0%.....again (as it did in the first week of August), look for all hell to break loose with risk.....again.

Belarus's picture

In the meantime, ECB buying has driven the EURUSD, and thus the ES higher, however briefly.

The EUR won't tank until next week. Right now it's all smoke and mirrors. Therefore, "however briefly," while sounds immediate, will not. It will be next week when the EUR really starts to slide. For Now they've got three more days to unleash rumors that EVERYTHING is fixed in Europe and it will not take an ounce of printing. ROFL. 

The Great News Folks: They are going to have to show "The Plan" soon enough, and then we might be able to make thoughtful allocation decisions. Until then, expect nuts. BTW, the rumors are doing such wonders to ramp the market up by a few trillion that I wouldn't be suprised at all to see "The Plan" delayed until early November. That way, they can pretend that a fix for everything is on its way, any day day, right, so they can ramp the market another couple trillion. Must be helping those French banks in spades. 

bank guy in Brussels's picture

Am thinking more and more, that it's time for the idea put forth by Richard Koo of Nomura ... We should begin a programme, where every eurozone country should start selling sovereign government bonds only to their own citizens and entities.

There are, perhaps, a few implementation questions ...

falak pema's picture

BTW : most people in France, Belgium, Spain Italy DON'T invest in their own stock exchanges. Most of the big corporations in Europe are owned by US and foreign institutionals. In addtion, as both governments and corporations use HEAVILY the bond market, as a result of puny stock markets as explained, there is much local savings that is neither in bond market nor stck market. In France this is huge, as all private savings is invested in life insurance and real estate. So issuing bonds to local investors only is not a stupid scenario. But Eurobonds long term seems to be the right route, once there is total fiscal and budget discipline in EU.

Blank Reg's picture


This just in from the Guardian:

Recent reports of large shipments of green ink and paper destined for the north pole suggest a white knight has come forward to bail out troubled European banks in late December. A vertically challenged polar assistant close to the negotiations known only as "Binky" reports: "The boss is going over his list of who's been naughty or nice and has scheduled a press conference for later this afternoon." Details to follow.

falak pema's picture

@Abelcatalyst :

This theory is short term from German perspective. They see themselves and uber-alles after anglosaxon meltdown in current crisis. Germany is NOT scared of its debt AS IT HAS A TRADE SURPLUS TO WIPE IT OUT EVERY YEAR UNLIKE USA. THE CURRENT 80% DEBT IS AN ACCIDENT OF HISTORY AS FOR REST OF EU; ITS A LEGACY OF 2008 CRASH, WHEN EU SOVEREIGN DEBT JACK KNIFED FROM  50-60% OF GDP to current 80%. As their deficits also went from 2-3% GDP to 7-8%. To support their private banks all sucked up in the collective greed-madness of financialised ponzi. This has to stop and the world has to reset.

So Germany can wipe outs its debt in four years, not USA. But Germany needs its growth via strategic markets : EU + BRIC.

So from this perspective of where Germany wants to be after the reset, its long term interest is to be TOP western player on the block facing the new Asian triumverate of China/India/Russia + Brazil+ Japan/Korea + USA. 

Merkel has to make this strategic trade off if she feels the collective will of EU is there to discipline Club Med PIGS and ensure German financial hegemony in a 500 million population market of future.

SHort term or long term? ...Who understands the German mind set living for 60 years in the dark of pax Americana shadow?

AngryGerman's picture

mindset: keep export high, control finances of other euro-states. they knew that the euro will lead to accumulating massive public and private debts by the usual suspect. implosion was programmed. just keep silent for 20 years and wait, position yourself to when it comes to be in the strongest position in order to redesign europe the way you want to.

it was a long term plan

would not like to be sarkozy right now as he realizes that

falak pema's picture

well, the other europeans like Sarkozy have to shut up. Thirty years of undisciplined spending and low growth and lack of productivity gains in South Europe economies including France means thay have to tighten belts, follow North Europe example and get disciplined. 30 years is a long time. The future belongs to the most disciplined and far seeing. Good for Germany if they can pull it off.

But in today's uncertain times, we are in the blind, as we do not KNOW what the real cumulative down side of financial ponzi is for each continent and what margins of maneuver they have.

oogs66's picture

Hedge funds exiting the basis package courtesy of ECB - classic!

RoadKill's picture

Poorly thought out article. It's not just German debt that's in Euros. All of it's assets are too.