Eurobonds - Nationalism Meets Federalism

Tyler Durden's picture


Via Mark J Grant, Author of Out of the Box,

I quote from the Wall Street Journal, “Germany opposes the issuance of jointly backed European bonds, arguing that they would allow inefficient, highly indebted economies to gain a free ride on the stability and favorable financial conditions secured by the more-disciplined countries. German officials have said that such bonds can be an option only once all euro-zone member states have improved the health of their finances and boosted their competitiveness.” This is the standard line that Germany has been using for some time now; allow me to translate this for you…”We don’t want to pay.” It is as simple as that so you can ignore the rest of the rhetoric.
France at the next EU summit is going to push for Eurobonds and Germany will resist in what may be a quite unpleasant stand-off. From Germany’s perspective I can easily understand their feelings about this matter because the consequences of Eurobonds are very negative for them. Germany is responsible for about 27% of the obligations at the EU and almost 20% of the liabilities of the ECB. Eurobonds are quite clearly a “transfer union” where Germany is the primary source of funding then for the rest of Europe and there are very significant consequences if this plan is pushed through.
Over a period of time, if enacted and used as the primary funding source for the European Union, Eurobonds will average the cost of funding for the entire construct so that Germany, the Netherlands, Finland et al. will pay a much higher cost for funding while the periphery countries lower their costs of financing. It will not just be funding that is averaged however and this is where the consequences become acute. The ratings of all of the countries in Europe will also get averaged so that you will eventually have an “A” rating for Europe and for the Eurozone institutions such as the European Investment Bank. Also you will average the standard of living for Europe so that the German economy will decline to the median while Portugal, Spain and Italy et al rise to the average. If Eurobonds are ever enacted I would suggest selling any/all of the “AAA” countries and buying the periphery ones as the correct play in the intermediate term. In fact, Eurobonds are the crux where Federalism comes head to head with Nationalism and where the rhetoric gives way to actualization. I would also surmise that if, somehow, Germany would agree to this scheme that Ms. Merkel will be forced from the Chancellery and in short order so that she is very quickly going to be stuck in between the rock and the hard place where what she says is going to have to measure up to what she is going to do and all of the excuses that we may get in the Press will not erase the liabilities that she is about to face.
A few other pertinent issues to consider along with Eurobonds:

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  • If everything seems to be going well, you have obviously overlooked something.
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  • What happens if you get scared half to death twice?
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Tue, 05/22/2012 - 10:16 | 2450819 Mongo
Mongo's picture

Debt Union ... bitchez!

Tue, 05/22/2012 - 10:21 | 2450845 AlaricBalth
AlaricBalth's picture

"Great indebtedness does not make men grateful, but vengeful."

German philosopher Friedrich Nietzsche

Tue, 05/22/2012 - 10:36 | 2450908 Ethics Gradient
Ethics Gradient's picture

The creditors would be vengeful as well.

Anybody care to guess what Euro bonds would be rated at? AAA? Not a chance.

Tue, 05/22/2012 - 10:54 | 2450993 malikai
malikai's picture

More importantly, what will happen to Bunds when they start backing Eurobonds?

Tue, 05/22/2012 - 14:43 | 2451932 piceridu
piceridu's picture

You really have to tip your hat to these ponzinomists. They seem to have an unlimited amount of acronyms to use to pass on unlimited debt to us muppets.

Tue, 05/22/2012 - 10:39 | 2450927 battle axe
battle axe's picture

The rest of the EU can push for it all they want, If Germany says "NIEN" then that is all she wrote....Budesbank has already said no fucking way. Saying NO, might be the only thing that saves Germany

Tue, 05/22/2012 - 12:10 | 2451291 odatruf
odatruf's picture

I disagree. German isn't saying no. They are saying not yet.

The road to Eurobonds will pass through the Budesbank setting conditions that can be just as easily fudged as the debt ratios required for joining the EU in the first place were.

It is probably true that actual improvements will be required before hand, but they won't be as onerous as they will sound. And they certainly won't be forward looking enough to prevent backsliding.


Tue, 05/22/2012 - 14:40 | 2451921 bank guy in Brussels
bank guy in Brussels's picture

As a number of ZH pieces have pointed out, Germany is itself, rather dishonestly deep into this dirty game and quite vulnerable. Germany has to pay and print and inflate, or else get hit by a runaway locomotive.

- Germany's 'wealth' is half-fake, from selling stuff to other European countries, which it in turn has financed, by Spanish etc. government bonds which are in turned held by Germany's banks and pension funds.

- If Germany won't play any more, (1) their banks go bust and (2) they must tell their workers that their pensions have half evaporated, and they too will have a street revolution like Greece.

It is cheaper and the path of least resistance for Germany, to do some loud complaining, and then submit, kicking and screaming, into the inflation - money printing - shared tax burdens, that will help cover up for the actually insolvent German banks and the insolvent pension funds holding mountains of European paper.

Even with scenarios like Greece leaving the euro, or the euro-zone splitting into two parts, the Germans still in the end have to recapitalise their banks and do something to mask the disaster in the pension fund holdings.

The least-resistance political path, as nearly always, is to tax, print and inflate, instead of liquidate.

Tue, 05/22/2012 - 19:44 | 2453302 Peter Pan
Peter Pan's picture

Actually it's not a debt union, it's an economic suicide pact.

Tue, 05/22/2012 - 10:18 | 2450826 Confundido
Confundido's picture

This idea was killed in March 2011. I think it is dead now too. Anyway, here is a link to someone's analysis of the implication of Eurobonds, done back in January 2011:

Tue, 05/22/2012 - 10:25 | 2450855 Spitzer
Spitzer's picture

The ECB doesn't even have bonds yet the biggest owner of US bonds is its own central bank (FED)

Dollar is the best fiat ? yeeeahh right

Tue, 05/22/2012 - 10:18 | 2450829 Frastric
Frastric's picture

Germany's percentage of debt to GDP would surge if eurobonds went through, as Germany would have to pay far higher prices on its bonds and bills. No wonder Merkel constantly dismisses the idea...

Tue, 05/22/2012 - 12:33 | 2451380 UK debt marsh
UK debt marsh's picture

The official debt:GDP ratio is over 80% (but stable)

There is very little spare capacity for lending their gold card to the Greeks, Spanish et al.

Already the other countries which are its main trading partners in Europe are sliding into recession.

Eurobonds are economic suicide (though more sleeping pills than .45 in the mouth).

Tue, 05/22/2012 - 10:19 | 2450830 CrashisOptimistic
CrashisOptimistic's picture

If this isn't happening, the mechanisms for printing disappear.

Simply that.  LTRO is a maximum 3 year maturity and it's clear Draghi won't do more.

They are out of bullets.


Tue, 05/22/2012 - 10:23 | 2450849 Doubleguns
Doubleguns's picture

They dont even have a knife.

Tue, 05/22/2012 - 10:19 | 2450831 agent default
agent default's picture

yeah when it comes to borrowing, it's a federal matter and Germany should be a good partner and get into more debt for the sake of the Union.  When it comes to spending, Germany should butt out because of national sovereignty.  National sovereignty with other peoples money.  Another EU first. 

Tue, 05/22/2012 - 10:19 | 2450833 Rip van Wrinkle
Rip van Wrinkle's picture

But didn't the German Constitutional Court deem Eurobonds illegal?

Tue, 05/22/2012 - 10:35 | 2450893 MeanReversion
MeanReversion's picture

Not really, as they never ruled on Eurobonds specifically, they ruled on the ESM (and that was just barely legal), although it was implied by the logic of that opinion that Eurobonds would be a non-starter.

Germany would in all likelihood need to change its Constitution to allow for Eurobonds.  That will NEVER happen.  The German electorate doesn't want to subsidise building bridges in Spain.  Germany knows full well how irresponsible Southern Europe has been in its spending habits, why would they EVER agree to place themselves on the hook for said projects?

It should be noted that S&P has stated that if Eurobonds were a joint liability of the Eurozone, they would have the rating of the weakest link, Greece, which is CCC, or in other words, LOL.

Tue, 05/22/2012 - 13:01 | 2451496 timbo_em
timbo_em's picture

There are some articles in the German constitution that are protected by an 'eternity clause'. So, they can't be changed at all. Furthermore, the Court of the Constitution has made it clear numerous times that the only institution that is respnsible for the federal budget is the Bundestag. In the past there were attempts to transfer more powers to Brussels but the Court always said "Nein! Dear MPs, you must not do that. It's your responsibility."


Tue, 05/22/2012 - 11:02 | 2451020 gatorengineer
gatorengineer's picture

Follow Obamas lead, whats a constitution?

Tue, 05/22/2012 - 10:20 | 2450838 Doubleguns
Doubleguns's picture

I would also surmise that if, somehow, Germany would agree to this scheme that Ms. Merkel will be forced from the Chancellery...


And a very strong nationalist would be immediately elected to lead germany from the euro.

Tue, 05/22/2012 - 10:50 | 2450974 CrashisOptimistic
CrashisOptimistic's picture

One of the big errors of ZH.

Merkel is the end point of German conservatism.  The parties making inroads into government of late are to her left. 

They would be DELIGHTED to authorize more support for Greece or anyone else and they would withdraw all objections to Eurobonds and also withdraw insistence on austerity.

Merkel, though she argues and eventually caves in at every crossroads, is the most reluctant of alternatives out of Germany.  Any replacement for her would be a true partner for Hollande.

Tue, 05/22/2012 - 11:07 | 2451038 gatorengineer
gatorengineer's picture

Sorry thats what the mainstream media here in the US would have you believe.  There are plenty of skin heads in Germany, all they need is something to unit them.  Look at France and LePen for an example, I am sure Germany is not far behind....  Right wing and Germany has a tendency to scare the world so its greatly downplayed.

All Sarkozy had to do is promise LePen a few choice cabinet posts and he would still be in power, after her indorsement, instead he got a "stay home" message...

Tue, 05/22/2012 - 11:57 | 2451235 johnnyyuma
johnnyyuma's picture

It's not the right wing Germany that scares all, it's the LEFT wing. National Socialist was left wing.

Tue, 05/22/2012 - 10:56 | 2451001 Tirpitz
Tirpitz's picture

And a very strong nationalist would be immediately elected ...

Just no one in sight. So the charade will continue.

Tue, 05/22/2012 - 10:28 | 2450844 bdc63
bdc63's picture

Blah, blah, blah.

What this boils down to is this: Germany will act in their best interest.  Period.

It is in their best interest to keep their banks afloat.

It is in their best interest to protect their "exports".

They will do exactly enough to ensure the above ... nothing more, nothing less.

It is NOT in their best interest to financially burden their citizens with the responsiblity of improving the financial lives of others who have shown less prudence ... AND THEY WON'T DO IT.

Tue, 05/22/2012 - 10:30 | 2450872 Spitzer
Spitzer's picture

It is in their best interest to keep their banks afloat.

It is in their best interest to protect their "exports".

Wrong on both counts. Its in the krauts best interest NOT to print money because they learned something after WW1 (Weimar) that the US didn't.

The US dollar has been falling for 10 years yet exports have been falling. The Euro has been rising for 10 years yet Germany's exports have been rising. Sure puts to rest that keynesian "weak currrency is good for exports " myth doesn't it ?

Tue, 05/22/2012 - 10:53 | 2450933 bdc63
bdc63's picture

What?  I am not suggesting that they print money ... I'm suggesting they will cut their loses

Yes they are worried about keeping their banks afloat.  Greece, Italy and Spain's banks? ... not so much.

Tue, 05/22/2012 - 11:03 | 2451026 Tirpitz
Tirpitz's picture
It is in their best interest to keep their banks afloat. It is in their best interest to protect their "exports".

Wrong on both counts.

Actually he is correct. Germany is shafting the workforce since more than two decades now, solely for the benefit of their export machinery. And via Greece and Spain bailouts, once more the German taxpayers will have to pay for all the products the international corporations can 'sell' to whoever receives German loans, for all the profits the international banks derived from burdening the PIGS with unrepayable debt.

Tue, 05/22/2012 - 10:28 | 2450857 JustObserving
JustObserving's picture

Issuing Eurobonds would be like the US issuing American bonds jointly with Argentina, Brazil, Peru, Colombia, Nicaragua, Honduras, Venezuela etc.  That will never happen.  

Tue, 05/22/2012 - 10:29 | 2450867 libertus
libertus's picture

Bad example. That happened in the 1980's under Reagan. I can't remember what they were called but I think it was Baker Bonds....

Tue, 05/22/2012 - 10:35 | 2450898 JustObserving
JustObserving's picture

Brady bonds.  Not the same thing as Euro bonds.

The US did not put its credit rating at risk.  Here are the details:

The principal amount was usually, but not always, collateralized by specially issued U.S. Treasury 30-year zero-coupon bonds purchased by the debtor country using a combination ofInternational Monetary FundWorld Bank, and the country's own foreign currency reserves. Interest payments on Brady bonds, in some cases, are guaranteed by securities of at least double-A-rated credit quality held with the Federal Reserve Bank of New York.

Countries that participated in the initial round of Brady bond issuance were ArgentinaBrazilBulgariaCosta RicaDominican RepublicEcuadorMexicoMoroccoNigeriaPhilippinesPoland,Uruguay and Venezuela


Tue, 05/22/2012 - 10:32 | 2450880 Spitzer
Spitzer's picture

No it would be more like the US issuing bonds for California, Texas, Detroit, North Dakota.... wait a minute....

Tue, 05/22/2012 - 10:27 | 2450861 ISEEIT
Tue, 05/22/2012 - 10:33 | 2450862 Paul Atreides
Paul Atreides's picture

Dear Sovereign Governments of the World,

You can print your own government created money interest/debt free and without issuing bonds. The control of monetary policy is a most sacred institution and belongs with the people not private central banks. We are sick and tired of the poverty, hunger, war and fraud that emanates from these private banking institutions. It is time we kicked the private central banking cartel to the curb and outlawed sovereign debt along with sovereign bonds.



Tue, 05/22/2012 - 10:29 | 2450869 PR Guy
PR Guy's picture

The problem is that all the non-German countries incorrectly think that if they have Eurobonds, it means they will pay (low) German rates of interest for their borrowing. They are mistaken. All that will actually happen if Eurobonds are introduced is that Germany will end up paying more to borrow and nobody in their right mind is going to do the old 'Turkey voting for Christmas' routine.

It reminds me of how easily performance related pay was sold to the masses as being a good thing. Unfortunately, 90% of the employees think they are in the top 10% of the performers.... but then they get the sad awakening. Employers 1 : Employees 0 (after extra time).



Tue, 05/22/2012 - 10:32 | 2450878 PR Guy
PR Guy's picture

Sorry, I forgot to add 'bitchez'

Tue, 05/22/2012 - 10:32 | 2450876 semperfi
semperfi's picture

Hey Europe, if you want to be socialist then this goes with the territory. Embrace it!  Love it!  Live it!

Tue, 05/22/2012 - 10:33 | 2450885 PR Guy
PR Guy's picture

Or if you're French or Italian, make love to it :-)

Tue, 05/22/2012 - 10:35 | 2450902 Spitzer
Spitzer's picture

Europe may be more socialist then the US but at least they pay for everything they have, out of pocket.

Europe doesn't have a trade deficit. Lets see the US do that. Its been 30+ years


Tue, 05/22/2012 - 10:35 | 2450895 barliman
barliman's picture



Germany tomorrow is isssuing 5 billion euros worth of 2 year bonds at ZERO % interest.

The only stronger negative response Germany can make to the Eurobonds nonsense would be to impale Hollande on a spike on during Eurovision.

Ratings would SOAR!


Tue, 05/22/2012 - 10:40 | 2450928 insanelysane
insanelysane's picture

Germany and Austria will leave Euro instead of trying to kick out Greece, then Spain, then Italy, then Ireland, then Portugal, then France, then....

Just easier.

Tue, 05/22/2012 - 10:49 | 2450970 TheTwoJohns
TheTwoJohns's picture

yawning and rollin my eyes over.. going long XAU and buiyng sme land doesnt seem as a bad idea..

Tue, 05/22/2012 - 10:52 | 2450982 Nobody For President
Nobody For President's picture

It will be amusing to watch Uberfrau Merkel hand Hollande his head - methinks the honeymoon will be over quite soon on the Merde pair.

Tue, 05/22/2012 - 10:53 | 2450984 Confundido
Confundido's picture

Germany's cds is trading like they would be likely to take a hit from subsidizing the Euro zone. If they were not...why would cds widen to 100bps recently? To me the fact that is was trading around 60bps was the signal that none of that shit was serious...


Anyway...can we really rely on sov cds prices for risk discovery, after Greece's debt swap or JPM's IG9 adventure?

Tue, 05/22/2012 - 11:15 | 2451060 sockratte
sockratte's picture

This is the end, beautiful friend 
This is the end, my only friend, the end 

Tue, 05/22/2012 - 11:28 | 2451099 Elwood P Suggins
Elwood P Suggins's picture

The ECB is going to print so much money they'll make Bernanke look like a piker.  Merkle will scream and kick but in the end she will not oppose it because the one thing that she will not allow is herself or Germany being put in a position where they can be blamed for destroying the euro.

Tue, 05/22/2012 - 11:44 | 2451182 sockratte
sockratte's picture

funny. all she did (or did not) contributed to the end of the euro. an finally to her own end, there seems to be no way out.

Tue, 05/22/2012 - 12:48 | 2451447 Nussi34
Nussi34's picture

I rather vote for outright war than for Eurobonds! These fucking PIIGS will not destroy the future of my children!

Tue, 05/22/2012 - 13:13 | 2451544 sockratte
sockratte's picture

funny. what did you do so far? how many billions of euros went to the banks? ;-)

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