Euro Bank CDS Surge To All Time Record After Collapse In German IFO Business Survey, Discord Over Eurobonds, Greek 2 Years Over 40%

Tyler Durden's picture

Following yesterday's plunge in the German ZEW investor confidence reading, today we got yet another confirmation that Germany's economic in freefall, after the IFO Business Climate survey printed at 108.7, the lowest in more than a year, down from 112.9, and a big miss to consensus of 111.0. The 4.2 drop was the highest since November 2008, when it plunged by 4.2. In summary, today’s disappointing Ifo data, if repeated in coming months, points “at least to sharp deterioration of growth, perhaps even recession,” Ralph Solveen, head of economic research at Commerzbank says." And unlike America, where hope is the only thing pushing investors forward, in Germany it is the inverse with the expectations component dropping belopw the 10 year average of 100.5, for the first time since July 2009, while the current assessment component is still above the 102.7 long-term average. Should this collapse in hopium consumption jump across the Atlantic, watch out America. Furthermore, while as was noted before, Merkel's continuing refusal to adopt Eurobonds is nothing new, today we got a new kink after German president Wulff questioned the legality of ECB bond purchases during a conference at Lindau, claiming that bond buying damages the ECB's independence. Wulff cited an article in the European Union's fundamental treaty, which prohibits the ECB from buying bonds directly from governments. "This ban only makes sense if those responsible don't circumvent it with comprehensive purchases on the secondary market," he added. "What independence?" might add anyone who has seen the global printing cartel in action over the past 3 years. Yet the recent expansion in the SMP, which has bought about €40 billion in Spanish and Italian bonds, is the only thing keeping Europe afloat now: if this were taken away, it is the beginning of the end. Another complication to any sustained EUR rally, is that the Finnish government announced overnight it is sticking to its collateral side deal with Greece, a move that apparetly has Germany fuming. Expect headlines as  Finland’s govt will meet this afternoon to discuss Germany’s rejection of collateral agreement the cabinet struck with Greece on Aug. 16, newspaper Helsingin Sanomat reported on its website without saying where it got the information. This may well be worth 200 pips in the EURUSD... to the downside. And lastly, the cherry on top is that Greek 2 Year bonds, just soared above 40% for the first time ever! So much for bailout #2. Time to star pricing in the 4th iteration as the 3rd one is now a certainty. All this means that iTraxx Fins Senior is now at an all time high of 255, +4 bps, while the Sub Index is also at a record of 453, +9bps. Look for a resumption in the serial close of trade of all Italian banks before Europe shuts down at 4:30 pm local.

Here is Goldman's commentary on the IFO:

German companies nicreasingly worried about outlook

 

The Ifo decline to a level of 108.7 in August after a reading of 112.9 in July; a significanlty weaker than expected reading.
At 100.1 the business conditions component of the survey declined back to around its long-term average (99.6).
The assessment of current conditions declined by more than 3 points (118.1 after 121.4) though it remains high on historical standards (long-term average is 101.1).

 

Detailed Commentary

 

The Ifo signals a further softening in economic activity during Q3 as well as an increasing uncertanity of the economic outlook. Translating this into hard data, however, is not straightforward. This is because growth was much weaker in Q1 than signaled by the Ifo - the quarterly average of business conditions in Q2:2011 was the highest on record. Note also in that respect that the diffusion index - the % balance of opion - still stood at a level of 10 in August, implying that a majority of companies assess the current situation and the outlook as "good".

 

We will have to wait for the first hard data for Q3 in order to re-calibrate the business survey's after the weak Q2. For the time being, however, we still see the business surveys being more consistent with a slowdown scenario for the German economy than stagnation or an outright recession.