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Germany Begins Quantifying The Cost Of A Greek Exit (And Discovers Contingent Liabilities Are All Too Real)

Tyler Durden's picture




 

First came the rhetorical jawboning, where following announcements by Fitch, European politicians, and finally Germany's finance minister, the scene was set to prepare the general public that despite protests to the contrary, a Greek exit from the euro would not really be quite the apocalypse imagined. Now comes the actual quantification part, whereby in addition to adding numbers and determining what the further sunk costs to a Greek bailout will be (hint: much, much greater than anyone can conceive), Germany has finally understood what we have been warning for over a year: that contingent liabilities become very real liabilities when a threshold event forces the transition from "off balance sheet" to on, and the piper has to be paid. According to an analysis released hours ago in Wirtschafts Woche, Germany "would only absorb losses of 76.6 billion euros in Germany. This amount results from bilateral aid loans, the liability of Germany's share in credit rescue fund EFSF, Germany's share of losses of the European Central Bank (ECB) and the German share of liability to the credit support of the International Monetary Fund (IMF)."

The quantification continues (google translated):

15.1 billion euros from Germany alone would have been awarded the bilateral loan write off, which was adopted in May 2010 part of the first rescue package are. 20 billion euros stuck to Germany as a liability amount from the second bailout by the IMF and EFSF. Would be added to the percentage loss of 12.1 billion euros of Greek government bonds, Federal Bank, which bought the ECB and these would have to write off a national bankruptcy in Greece. On further € 28.1 billion would amount to the federal share of the losses in the so-called target of the ECB claims against Greece.

A far bigger issue, however, is that once Greece bails, the contagion effect would begin: first by Fitch downgrading all European countries as it warned yesterday, then more and more countries becoming ineligible for EFSF/ESM participation, as we warned last July when we predicted this entire chain of events in "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP" when we explained how in a daisy chain collapse of European countries which could only be sustained, paradoxically, by an exponential expansion in the EFSF, could result in Germany easily footing 32% of its GDP (and in reality up to 56%) in "contingent liabilities":

And the biggest concern, one which WiWo only briefly touches upon, is that once the EMU exits begin, and the Eurosystem collapses, all those receivables due to the Bundesbank become null and void, or at best payable in drachma, peseta, escudo, and lira. In other words: completely worthless. As a reminder, at last check the total amount of TARGET2 obligations had soared to a record 25% of German GDP.

So while we appreciate Germany's first attempt at quantifying the cost of the Greek exit, the truth is that the number proposed is woefully inadequate. And the roughly 50% of German GDP already "sunk" will only get bigger and bigger, until finally there is no choice for Germany but to pull the plug.

What, however is most important, is that after months and years of even denying this potential outcome as a possibility, Germany too has finally discovered that when it comes to numbers, no amount of rhetoric can change the final outcome.

That the quantification of costs has finally started is critical. And yes, we are confident that the true final number, one that Zero Hedge predicted with precision last July, will soon be derived even by the most hardened pro-Euro German press.

 

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Sat, 05/12/2012 - 12:37 | 2419826 Harvey Lee Oswald
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Don't worry, Germany says everything will be alright. Now go on and be a good sheeple just BTFD.

C'mon now repeat after me, BTFD, BTFD, BTFD.

Sat, 05/12/2012 - 12:38 | 2419828 jcia
jcia's picture

bye bye BITCHEZ

Sat, 05/12/2012 - 12:47 | 2419842 TheFourthStooge-ing
TheFourthStooge-ing's picture

Damn you, arithmetic! Why do you curse us so?!

 

Sat, 05/12/2012 - 12:59 | 2419868 Colombian Gringo
Colombian Gringo's picture

Extend and Pretend, Eurostyle, Bitchez!

Sat, 05/12/2012 - 13:21 | 2419899 Cdad
Cdad's picture

In relation to the costs associated with Greece leaving the Union, how much has Germany already set aside within its banking system for just such an event?  I ask because I forget the number now, but something tells me...it might be, oh, I don't know...76 billion Euros, give or take.

Sat, 05/12/2012 - 13:52 | 2419973 NewThor
NewThor's picture

There is no Euro.

There is no Dollar.

All we have is us.

Sat, 05/12/2012 - 15:02 | 2420100 Manthong
Manthong's picture

I don’t understand..

Are the Greeks working for the Germans or are the Germans working for the Greeks?

Sat, 05/12/2012 - 15:16 | 2420124 The trend is yo...
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Where is christine lagarade pithching the "all in" and "no exit for anyone" mantra 

Sun, 05/13/2012 - 04:31 | 2420789 Harlequin001
Harlequin001's picture

The instant this happens and any kind of post collapse stability returns the US is soooo fucking dead.

No one is going to want dollars, no one, not even the US. There will be far too many for them to cope with. This is no different at all than the run up to Weimar.

Me, I got gold, and after the recent plunge, a lot more silver...

Thanks Ben...

Sat, 05/12/2012 - 15:19 | 2420136 Rynak
Rynak's picture

Both are working for for banksters. Heck, there isn't even a bailout of greece, only a bailout of creditors. The nationality bullshit is just spread to divide and conquer "please fight among yourself and put your head in the sand, while we pillage the entire continent (and on a longer term the planet) dry.

Sun, 05/13/2012 - 04:34 | 2420791 Harlequin001
Harlequin001's picture

but surely you must have realised by now that this is a once in a multi-generational opportunity to benefit yourself by buying gold well ahead of the game...

There is nothing you can do about what follows, so why not?

Sat, 05/12/2012 - 16:05 | 2420201 Peter Pan
Peter Pan's picture

Truer words have not been spoken today New Thor...

Sat, 05/12/2012 - 16:33 | 2420235 brettd
brettd's picture

Got friends?

They'll be very valuable in the coming seasons.

Sat, 05/12/2012 - 14:03 | 2419997 smlbizman
smlbizman's picture

wasn't it already established that it was...."cheaper to keep her......and thats why they tried to salvage..

Sun, 05/13/2012 - 04:36 | 2420794 Harlequin001
Harlequin001's picture

actually CDad I suspect it's nearer to zero...

Sat, 05/12/2012 - 13:47 | 2419965 Think for yourself
Think for yourself's picture

Sure, I'll BTFD. Just not the one you seem to be talking about.

Sat, 05/12/2012 - 17:49 | 2420306 jamezelle
jamezelle's picture

Silver, bitchez!

Sat, 05/12/2012 - 16:25 | 2420223 Romford_Dave
Romford_Dave's picture

Maybe they mean once Germany leaves Euroland it'll be alright?

Trillions of Drachma/Peseta/Lira/Franc und Euros the German people are on the hook for will probably equate to about 3 new Bundesbank DMarks.

Sun, 05/13/2012 - 00:25 | 2420712 Buck Johnson
Buck Johnson's picture

Reminds me of the Science Fiction story called The Cold Equations.  No matter what they wanted and what they tried the numbers for survival still came to the same thing.  Germany was foolish enough to continue to back this mess up and now it's about to cost them their economy. 

Sat, 05/12/2012 - 12:39 | 2419829 veyron
veyron's picture

I always envisioned european 'chicken' as two cars heading toward each other on the autobahn ...

Sat, 05/12/2012 - 17:53 | 2420308 tenpanhandle
tenpanhandle's picture

I remember, many many years ago, a headline in the news paper about two Italians (in Italy) both had their heads out the window, yelling and cursing at other drivers when they literally had a head-on collision, both their heads colliding with a pop.  It was hard to feel sorry for them.

That has always been my idea of "European Chicken".  I guess they were blinded by their own saliva as they spewed and  sputtered words condemning other drivers while they failed to watch their own driving.

Sat, 05/12/2012 - 12:39 | 2419830 Rainman
Rainman's picture

Hilarious...the Germans want to believe there is only one bad apple in the barrel and will plan accordingly. Like Scarlett O'hara they'll worry about the rest of the mess tomorrow. 

Sat, 05/12/2012 - 12:43 | 2419834 Harbanger
Harbanger's picture

I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.

Sat, 05/12/2012 - 16:26 | 2420118 Sudden Debt
Sudden Debt's picture

The Germans know all to well that all the Greek companies have their debt in Germany, belgium and france and once they go to the drachme all their debt much be repayd in drachmes.
They'll start at 1 drachme per euro but it will drop like a stone and than their debt will also devalue by about 60%.
the kicker is that there are a lot of companies who moved their corporate offices to greece in 2009 when it became clear they where going to default!! So they could cut their debt for cheap!

But banks are going to bleed bigtime. So not only because of the greece as a country but the companies who played the game.

Sat, 05/12/2012 - 16:40 | 2420238 Rynak
Rynak's picture

What you didn't mention, is that wages will drop as well.... that sure will temporarily boost "exports" versus imports..... but well, it is a bit like going from the one total idiocy, into the opposite total idiocy.

Striving for selfsustainability.... is that so utopian?

Or is it that the import vs. export dichotomy is only pushed so hard popularily, so that their believers stay stuck in an endless loop of fail, from which sharks can profit?

It's almost like going hunting.... except of, the victim you shoot, isn't outrightly killed, but just being "marked" for pillage in "n turns gametime".

Doesn't anyone wonder what it could mean, that the PIIGS as well as the "core" seems fucked, even though they have pushers/exporters as well as junkies/importers among them?

How the fucking hell does anyone think this "game" works anyways: "Take this money from me and buy my wares, and i'll become rich" vs. "Destroy your ability of self-sustainment, and you'll get freebies for a limited time.... at which the creditor will own you".... how does one even put a positive "spin" on this, without outrightly ignoring all of this, and inventing an alternative illusionary worldview in which pigs really fly? Oh wait... nevermind.

Sat, 05/12/2012 - 19:29 | 2420399 BigDuke6
BigDuke6's picture

Rocco Ravishes Athens.

Greek style with a german twist.

Sat, 05/12/2012 - 16:10 | 2420206 Peter Pan
Peter Pan's picture

"The Germans want us to believe there is only one bad apple in the barrel."

The apples are fine......it's the barrel that's the problem.

Sun, 05/13/2012 - 08:11 | 2420880 Zero Govt
Zero Govt's picture

how about both the apples and the barrel being rotten

in context i think it's called 'socialism'

Sat, 05/12/2012 - 16:26 | 2420224 Peter Pan
Peter Pan's picture

The strange thing is that they want to break the big banks up because of the risk of general collapse that they can cause if they fail, yet the system is so fragile and interconnected that a tiny nation like Greece is creating the fear of Armagedon. The lesson is that both big and small can be lethal.

Sat, 05/12/2012 - 12:41 | 2419831 AssFire
AssFire's picture

Go Greece!

Be the domino that gets this collapse started.

There are so many IOU's of fiat money in that card game; no one can turn in a marker or the whole game ends.

Sat, 05/12/2012 - 16:27 | 2420173 Sudden Debt
Sudden Debt's picture

Lesson 1 in marketing to get a trend started:

1. There needs to be somebody, a inventor, who starts something.
2. The inventor rarely gets the trend started but he needs to do 1 thing. Find a fool who will follow him and who's convincing enough to make others adopt his believe.
3. And the adopters will spread the trend.

Greece is just the inventor of leaving the euro. There needs to be one more follower and after that one adopter and than you've got a trend and than europe is over.

So first greece, than spain and he who follows spain will destroy europe. My guess will be holland who will run for the hills and do the smart thing to do.

Sat, 05/12/2012 - 15:50 | 2420176 newworldorder
newworldorder's picture

The FED has just finished auditioning for the part of "rich uncle from mars who brings money" on the new Euro Save movie. Rumor has it that they definately will get the part.

Sat, 05/12/2012 - 12:43 | 2419835 carbonmutant
carbonmutant's picture

Well, we're getting down to the real reasons Merkel didn't want Greece to make a run for the border...

Sat, 05/12/2012 - 13:00 | 2419853 AssFire
AssFire's picture

My greatest hope is the "United" States (united by threat of war if you try to leave the union) will have as bad a collapse as the coming EU collapse. Only a complete failure of the dollar can break the Feds grip on power and return rights the states. Just another year or two of current conditions and some states will be openly bailing out the progressive states. This is already occuring as the government continues to reward states with higher than usual unemployment with a never ending stream of unemployment benefits.

Sat, 05/12/2012 - 13:15 | 2419905 Harbanger
Harbanger's picture

No fed buying of debt. No bailout for the states.   Allow the states to renegotiate debts and union contracts like any other bankruptcy.

Sat, 05/12/2012 - 14:23 | 2420034 Bring the Gold
Bring the Gold's picture

Progressive eh? The coastal states have been providing the Lion's share of tax revenue for decades and most of that was sunk into the black hole of Southern states. No doubt California is a black hole of statism and taxes, but for many decades it was a source of transfer of payments to conservative states in the South. It's all a tad more complex than progressive vs conservative. Really whats more worrying to me is dogmatists on both sides of the specturm vs realists left, right, center and off the map. Those who want to tell me how to live - and back that up with force of law - worry me regarless of the party affiliation. Especially when you consider that the moralists of both parties seem to be completely blind to the annihilation of rights economic and civil within our nation. It's not a left vs right thing. It's a clear thinking vs easily confused/enraged zealot thing.

Sat, 05/12/2012 - 15:00 | 2420099 Joe The Plumber
Joe The Plumber's picture

More rage and more extremism please. Collapse the fucker already

Sat, 05/12/2012 - 17:14 | 2420277 Harbanger
Harbanger's picture

What are you talking about it's not Progressive vs Conservative? keynesian economics was the Progressive's challenge to Classical economics.   The entire fiat ponzi is a century old Progressive scam.  btw- Your name "bring the gold" sounds pretty darn conservative.

Sat, 05/12/2012 - 23:39 | 2420670 Lednbrass
Lednbrass's picture

What a liar.

Enraged zealot indeed, what you say simply is not reality.  Your specious claim is based on total federal expenditures and there are some major factors at work you are ignoring for the sake of being a self righteous lying dickhead. The handout states arent in the South, and you are relying on some flawed bullshit studies with questionable sourcing. You are either gulliable, stupid, or a liar so in the interests of reality here is the real world.

Here is Federal expenditure by state for 2010, this was the final year for the CFF report as the Obama administration discontinued it-

http://www.census.gov/prod/2011pubs/cffr-10.pdf

Table 13 show expenditures by state, overall then broken down into retirement, procurement, grants, salaries, and other.

Per capita Federal expenditure by category is shown in table 14. Who are the top 5 recipients per capita?

1) Alaska 2) Virginia 3)Maryland 4) Connecticut 5) Hawaii

Welp, looks like so far youre a lying asshole. Look how low the South is on the grants list.

What money do they take in? 2010 IRS figures are here

http://www.irs.gov/taxstats/article/0,,id=206488,00.html

OK, so when we compare money paid  vs. money received, who gets the most money?

1) Virginia- 78,128,254,000 2) Florida- 75,339,258,000 3)California- 60,455,894,000 4) Maryland- 48,588,785,000 5) Pennsylvania- 44,075,246,000

The only net donors are-

1) New Jersey- 37,952,547,000 2)Minnesota- 23,634,129,000 3)Delaware-7,251,877,000 4) Illinois-1,071,060,000 5)Ohio- 34,026,000

Virginia alone takes up the entire surplus because the vast bloated federal bureaucracy took over the northern part of the state.

Whaddaya know, once again youre a lying asshole. So far your "South takes money from elsewhere" theory is total bullshit.

Must be per capita spent vs, recieved, right? Surely you cant be completely fucking clueless.

1) New Mexico- 3.67 2) West Virginia- 3.58 3) Mississppi- 3.48 4) DC- 3.37  5) Hawaii- 3.32

Only one state from the South there, looks like you really are a goddamn moron.

The main reason the South does get anything from Uncle Sugar  is because of all the damned northern retirees who decide to pollute them after a life spent ruining their own states and a very disproportionate military presence.  Add in the fact that manufacturing is also moving to the South from the overregulated New England and Left Coast states and thats the majority of any Federal money that goes there.

Face it, you read a badly sourced "study" and swallowed it whole because youre an effete leftist urban asshole and are too stupid and too lazy to actually check into anything for yourself. It painted a totally fake picture of northern leftist states funding he poor benghted South and that fit into what you want to think so you just bought into it because you are just too damn dumb to think critically.

Now fuck off you idiot herd beast, go chew your cud.

Sat, 05/12/2012 - 23:51 | 2420680 AssFire
AssFire's picture

Nice rant, I'm gonna keep my eye on you. California's debt just hit 16 billion- that leftest probably lives in Ca. Leftists always find someone elese to blame and always find a card to play so that they can't be critcized.

Sun, 05/13/2012 - 08:58 | 2420921 DanDaley
DanDaley's picture

California's unfunded liabilities: Tens of trillions!  "Spending other people's money just feels soooo good" (Jerry Brown overheard mumbling at a zen meditation).

Sun, 05/13/2012 - 08:50 | 2420918 DanDaley
DanDaley's picture

It's not a "left - right" argument, it's a "small government vs big government" battle.  Controlling (big) governments murdered 100 million + in the 20th C., but that's probably peanuts compared to what's coming.

http://www.google.com/imgres?q=political+spectrum&hl=en&biw=1280&bih=631...

Sat, 05/12/2012 - 14:47 | 2420081 GMadScientist
GMadScientist's picture

Which states, other than say North Dakota, would be "bailing" anyone?

http://www.latoyaegwuekwe.com/geographyofarecession.html

Sat, 05/12/2012 - 15:03 | 2420104 Joe The Plumber
Joe The Plumber's picture

Actually the North sucked capital out of the south for about 130 years due to the tariff of 1831. British manufactured goods were kept out and northern manufacturing was subsidized. Thats why we be po and ignernt in the south

Reparations bitchez. You yanks owe it to us

Sat, 05/12/2012 - 15:53 | 2420179 smb12321
smb12321's picture

You are deeply underestimating the creativity of the powers that wannabe to obfuscate, delay, cover, change and forestall the inevitable.  Even the most rabid supporters of Social Security and Medicare acknowledge their eventual bankruptcy but then quickly switch the subject to starving Grandmas.

What separates us from the EU is our policy of money flow from rich to poor states. Until recently, it was the Northeast, Michigan, Ohio , CA (blue states) that funded the South.   Now it is the other way around.

CA and IL will first try to shame, then scare Congress.  There is nothing you or I can do if DC decides to bail them out.  The template exists through TBTF.

Sat, 05/12/2012 - 16:40 | 2420242 brettd
brettd's picture

Isn't that almost guaranteed, with the Fed backstopping various European bank/entitites?  Bring the whole thing down in one fell swoop.  Otherwise, the USA would, in spite of its insanity, be back as king of the hill.  That will be unseemly.

Sat, 05/12/2012 - 19:14 | 2420383 ghenny
ghenny's picture

Thanks God I live in Michigan then because if your scenario is correct the only thing that will matter is enough food and water.  We have plenty of both and our state debt is pretty modest too despite all the bad press about Detroit.

Sat, 05/12/2012 - 12:49 | 2419843 Nussi34
Nussi34's picture

Current guarantees per German taxpayer depending on income (only GIPS default, excl. Italy, France or Belgium):

http://www.deutschland.net/content/haftungspegel-je-ekst-zahler

It is about one annual gross salary.

I assume that when it is time to pay Germany will just do what Greece is doing and say "yes we have a contract, but we will not pay"-

Sat, 05/12/2012 - 12:49 | 2419844 Uncle Remus
Uncle Remus's picture

Scheiße

Sat, 05/12/2012 - 12:58 | 2419863 ISEEIT
ISEEIT's picture

Does this mean that rehypothecation is a real word?

Sat, 05/12/2012 - 13:12 | 2419898 Possible Impact
Possible Impact's picture

rehypothedefecation is a better word.

 

Sat, 05/12/2012 - 12:57 | 2419867 rebelscum1967
rebelscum1967's picture

ZH is relentless I love it. "Monkeyhammered" is my new favorite word.

Sun, 05/13/2012 - 11:28 | 2421127 Theosebes Goodfellow
Theosebes Goodfellow's picture

Not to be too trendy, but the latest one is "Grexit". I simply love it. Thanks, Tyler!

Sat, 05/12/2012 - 13:11 | 2419887 JackT
JackT's picture

After Greece exits and switches to the drachma, what happens to the Greek businesses that owe other businesses in Europe? If the drachma is essentially worthless I assume the Greek businesses will just simply default on their non-Greek payments and pretend it never happened?

If the German central is really owed $800bn by other private European businesses, and if these businesses default, then we are going to see some serious credit retraction..which obviously leads to a serious misuse of ink.

Long on ink, short on time.

Sat, 05/12/2012 - 13:16 | 2419909 xela2200
xela2200's picture

One of 2 things:

1) government acceps Euro as legal tender along side the Drakma.

2) Everything gets revalued in Drakmas based on some exchange rate imposed by government.

 

The longer Germany waits, the worst the pain will be.

Sat, 05/12/2012 - 13:19 | 2419915 JackT
JackT's picture

Thanks. So it seems the business owner gets their debt inflated away?

Sat, 05/12/2012 - 13:49 | 2419970 xela2200
xela2200's picture

More likely the other way around. Everybody gets screwed to save the government and the banks.

Sun, 05/13/2012 - 08:21 | 2420896 Zero Govt
Zero Govt's picture

why would Greek businesses trading/holding Euros change to the Greek Drachma?

Jim Sinclair makes a good point today the €euro will increase in value when steaming broke Greece drops out

..if i were a Greek business (if there's any left after decades of socialism) i'd stay firmly in the Euro and trade in it too for the foeseeable future

Sun, 05/13/2012 - 10:41 | 2421030 xela2200
xela2200's picture

When Argentina defaulted, they froze all account held on dollars and converted them to pesos at a very unfavorable rate (corralito). If the Greek government decides not to allow the Euro to be used as legal tender in the country all assets and obligation will be converted to Drachmas at whatever rate they see fit. Remember, countries have to recognize the legal tender. That is why in the US you cannot get a loan in Pounds or Rubles. Some countries do allow a foreign currency to be used as legal tender usually the dollar. In those countries, individuals can write contracts, have deposits in that currency, obtain loans just as the local currency. Therefore, a lot depends on how the Greek government wants to go about it since they hold ALL the cards. They make laws. Usually, governments in that position end up screwing their citizens and businesses to save the government and the banks.

Imagine having a mortgage with Wells Fargo in dollars and in your next statement you owe the money in Drachmas at whatever rate the government saw fit to convert. The point is businesses will not have a choice on the matter, and the government needs everybody in Drachmas.

 

Sat, 05/12/2012 - 13:40 | 2419951 msamour
msamour's picture

Greece will have to pass a law voiding all previous transactions in Euro, and they will have to pass another law preventing other European nations from collecting debt/or converting old Euro debt into the new/previous currency. Other European nations will not like this of course, but Greece will have to do exactly what Iceland did, and then look forward to the future instead of the past.

Sat, 05/12/2012 - 18:10 | 2420328 Cameli
Cameli's picture

Look forward to the future? What future? If they revert to the Drachma they are absolutely fucked. It will be a completely worthless currency. Their ecomony will vaporize faster than MFG client money. But hey maybe they have a huge stash of gold somewhere that they can use to fund imports like oil and stuff that they might need because there ain't anybody going to lend them real currency or advance credit.

Sat, 05/12/2012 - 16:45 | 2420249 brettd
brettd's picture

Easy.

Greek businesses throw up their hands and say '...not my fault!  The Government and banksters did it!"

Allyeallyeincomefree!  

Sun, 05/13/2012 - 10:49 | 2421049 ATM
ATM's picture

aint going to be drachma. the rest of the EU cannot allow it. They will try to retain control by scaring the German people into believing that a Greek default will be far worse than a little inflation brought on by money printing.

Man are those fuckers going to be surprised, and we Americans too.

Sat, 05/12/2012 - 13:10 | 2419897 xela2200
xela2200's picture

Economists and finance people think that they can create financial instruments based on mathematical formulas and make risk disappear for underlying loans. They are no smarter than a 10 year old. 

Sat, 05/12/2012 - 13:16 | 2419910 JackT
JackT's picture

I don't know if they think they can make risk disappear. They know it's there. They just try to dilute their share of it y burdening everyone else with it. I agree with your "10 yr old" statement, if they were are not responsible when creating it then we cannot expect them to be responsible enough to manage it afterward.

Sat, 05/12/2012 - 13:54 | 2419977 xela2200
xela2200's picture

I was referring to the gambling mentality where every gambler thinks they can find a "system" to beat the house only to find out they cannot beat the laws of probability. Instead of accepting been wrong, they feel their system just needs tweaking.

Sat, 05/12/2012 - 16:17 | 2420214 Peter Pan
Peter Pan's picture

Xela 2200, they don't make risk disappear. They actually magnify it through leverage and by spreading it throughout the system.

Sat, 05/12/2012 - 13:17 | 2419914 Freewheelin Franklin
Freewheelin Franklin's picture

Are they taking into the consideration the option of going to war?

 

Of course they are. It was always Germany's plan to take over the world from the beginning of the EU "experiment". Their desire to control the world goes all the way back to the Saxons.

 

"Why does a mouse go like this, looking for cheese? Because he is a mouse.

Why does a German try to take over the World? Because he is German"

- Mr Panos

Sat, 05/12/2012 - 13:34 | 2419940 magpie
magpie's picture

Even if it were so, one can assume this Germany on track to world domination is more bankrupt than the Kaiser's Empire, the Third Reich and the German Democratic Republic put together.

Sat, 05/12/2012 - 15:56 | 2420186 smb12321
smb12321's picture

And yet, playing Devil's Advocate, what is Germany to do?  Leave and occur a mountain of loss or stay and see the rest of Europe take larger and larger chunks from the only productive member state left?   It's not an easy choice.   Best for Germany is keeping the EU intact with a drastically reduced Euro - perfect for their economy and oddly, also for the PIIGS who once depended on travel for income.

Sat, 05/12/2012 - 16:16 | 2420212 magpie
magpie's picture

Monetization, and since Europe isn't the center of the world, even more monetization.

Sun, 05/13/2012 - 01:38 | 2420762 WAMO556
WAMO556's picture

Germany has the largest portion of military bases on its soil. There are far less Allied soldiers in Germany then before, so if the Germans, Japanese and Chinese decide to NATIONALIZE everything, what are the allied troops to do other then getting re-patriated AFTER the war is over. Imagine that, England no longer a superpower to challenge the rising continental superpower of Germany!!! Everybody else is in decline except for who????

Sun, 05/13/2012 - 03:20 | 2420781 Non Passaran
Non Passaran's picture

Garbage analysis

Sat, 05/12/2012 - 13:24 | 2419923 trilliontroll
trilliontroll's picture

Thomas Jefferson:

The price of freedom is eternal vigilance.

Sat, 05/12/2012 - 13:30 | 2419932 slackrabbit
slackrabbit's picture

The price of slavery, is eternal bailouts.

SlackRabbit

Sat, 05/12/2012 - 14:52 | 2420085 GMadScientist
GMadScientist's picture

The price of lack of vigilance, is slavery.

 

Sat, 05/12/2012 - 16:21 | 2420218 Peter Pan
Peter Pan's picture

Actually it is the other way round......the price of bailouts is eternal slavery....

Sun, 05/13/2012 - 08:23 | 2420899 Zero Govt
Zero Govt's picture

the price of Govt is waaaaay too much

..bin this sick expensive joke

Sat, 05/12/2012 - 13:36 | 2419945 disabledvet
disabledvet's picture

There's a problem of "interconnectedness" which is even more terrifying actually. Will Airbus cease operations for example? And then of course there is the European government itself. That's right: "they got one of those too." inside that believe it or not is among other things a Space Program. Is that in danger too? And then there's the Common Agricultural Policy as well as the various defense projects (euro fighter, euro copter, the European defense forces in general.) the list really does go on and on...

Sun, 05/13/2012 - 03:17 | 2420780 Non Passaran
Non Passaran's picture

It seems a closing sarcasm off tag is missing in above comment

Sat, 05/12/2012 - 13:42 | 2419954 piliage
piliage's picture

I've said it before but I'll say it again, Germany is now in a lose lose situation.

Greece defaults, Germany needs to pay off Deutsche Bank's bad notes and a bunch of the EU's bad debts to Greece and then end up with a 30% super stronger Euro II (which is more like a Deutschmark) killing Germany's export economy and nullifying that bogus balance of trade they currently have.

Or, Germany sets up a permanent transfer union to the PIIGS, 50-100 bil a year every year, as a rent for the under valued Euro.

How's that EU working out for ya?

Sat, 05/12/2012 - 14:05 | 2420005 hornster
hornster's picture

Or how's this:

Germany sees saving the euro in the long run as futile.  Hello Deutchmark II.  But they will need to destroy its value to keep its export market viable.  Destroying the value of one's currency is the best thing banksters do.  They can simply assume liablility for all the bad loans made in the past on the euro's behalf.  They are the lender after all, so they have to eat it.

Sat, 05/12/2012 - 14:25 | 2420041 piliage
piliage's picture

Interesting wrinkle. The X factor in your theory is the German voters, who have no time or desire to set up any type of transfer union. Merkel is paying a political price now as most German voters think they have already 'helped' the PIIGS too much.

Given the leverage of the EU banks right now, and also given that most of that leverage is held in Germany, it will be interesting to see how much crap sits on those balance sheets when Greece, Spain, Ireland, or Italy finally says FOAD.

 

Sat, 05/12/2012 - 14:34 | 2420057 TheFourthStooge-ing
TheFourthStooge-ing's picture

piliage said:

I've said it before but I'll say it again, Germany is now in a lose lose situation.

The only option Germany has left is bombing Pearl Harbor again.

 

Sat, 05/12/2012 - 14:54 | 2420088 GMadScientist
GMadScientist's picture

http://www.youtube.com/watch?v=q7vtWB4owdE

"Forget it, he's rolling..."

Sat, 05/12/2012 - 14:56 | 2420095 magpie
magpie's picture

"What has Greece ever done against us ?"

"You should be asking what they ever did for us."

Sun, 05/13/2012 - 08:31 | 2420906 piliage
piliage's picture

Gave us the aqueduct?  Oh sorry, wrong film...

Sat, 05/12/2012 - 13:52 | 2419974 Its_the_economy...
Its_the_economy_stupid's picture

of course when we talk about "Germany's share" we are talking about the "little"people" 's share. The banks have already ofloaded the paper or expect a bailout.

Sat, 05/12/2012 - 14:00 | 2419987 debtor of last ...
debtor of last resort's picture

nice: http://www.querschuesse.de/target2-salden/

 

I mean, not nice... handy?

Sat, 05/12/2012 - 14:43 | 2420075 magpie
magpie's picture

Seems like a nice amount to print, not yet a trillion but TARPesque enough.

Sat, 05/12/2012 - 14:08 | 2420008 Piranhanoia
Piranhanoia's picture

Countdown to the "debt holiday" has begun. There will be a joint announcement from the junta G20  that all debt has to be eliminated. They will try to save their jobs, the corrupt governments they have destroyed, and run for their lives.  Soon we get to see the first in a series of "you didn't qualify" denials to fund the bailouts promised.

Fiver says it's over by September.   

Sat, 05/12/2012 - 15:10 | 2420112 Eally Ucked
Eally Ucked's picture

The whole trade is just mirage and good will. Everybody buys something for nothing, just promises to pay for it in the future. I wonder how much Germany makes in real terms, that means excluding fake loans to buy something from them and (probably) they can say good bye to all those loans in near future. Before anybody pays all those loans the real stuff is really obsolete. If somebody can't buy your stuff for cash or very short term loan forget it. All those GDP numbers are just fake based on some imagined income coming in future. Is it coming?

Sat, 05/12/2012 - 15:43 | 2420164 mendigo
mendigo's picture

Welcome to the machine. Pay no attention to the man behind the curtain. The insight that Tyler provides even if some is overstated is very powerful especially because frequently he is proven right unlike Nobel prize winning econartists and sell side anal-ists. But in the near term the system can ignore reality and in the longer term well all be dead. The smart move would be for the eu nations to cooperate from a position of mutual respect but I doubt that will happen because of political and business interests. So it will be kept afloat until they are ready for the collapse at which point all debts are off. No?

Sat, 05/12/2012 - 16:00 | 2420193 jackinrichmond
jackinrichmond's picture

its karma..  67 years later greece gets their war reparations.  the nazi's really did a number on the greeks = now it's payback time.

Sat, 05/12/2012 - 16:33 | 2420234 Peter Pan
Peter Pan's picture

I somehow agree but watch the Germans perform some "Karma" Sutra trying to keep the Greeks in position.

Sat, 05/12/2012 - 16:07 | 2420207 lolmao500
lolmao500's picture

You know they gonna double down on the stupid right??

Sat, 05/12/2012 - 17:11 | 2420278 hooligan2009
hooligan2009's picture

I am a little perplexed as to why the focus is on Germany's liability for "bailing out" PIIGS and Greece especially. The misselling of German goods to the periphery is pretty much the same as lending money to no income families to buy houses. Additionally, Germany has unfunded liabilities and loan losses stemming from its own economy, from massive health costs, underemployment, unfunded state pensions, loan losses form its (bankrupt) Landesbanks and the massive overleveraging in its leading banks like Deutsche and Commerzbank. Why focus on the little problems when the big problems for Germany are there for all to see?

Sat, 05/12/2012 - 17:57 | 2420313 q99x2
q99x2's picture

Ya the banksters that are funding their next election and giving them favors under the table might lose a dime. Why can't let that happen. Better f'n kill everyone. Mother Fuckers.

Sun, 05/13/2012 - 03:14 | 2420779 Non Passaran
Non Passaran's picture

Drop dead, moron

Sat, 05/12/2012 - 22:49 | 2420607 WallowaMountainMan
WallowaMountainMan's picture

'blinks'

 

what a great use of that term. game theory on. game theory over.

Sun, 05/13/2012 - 00:09 | 2420696 WallowaMountainMan
WallowaMountainMan's picture

 

just a thought.

 

can bernanke win?

there are times when the ones who have the least knowledge have insight. i certainly have the least knowledge in the room. but as to the insight?

everyone is anted into the game (china blinked today too)? all printers know the print. teams are dividing up: boj,pboc,ecb, fed, and whatever's their name vs zero hedge et all us tag alongs.

All we ( i mean u zh et al) have to do is strategize it for mr. b.

england is just an island, as is japan. just facts, sorry folks. euro dudes can't print as fast as we can. too many governments that need to decide. china now has no illusions that it matters how many fiats there are, they're all fiats. might as well go with the other big fella in the room and divvy up the old world. japan would go along for sure. what do they have to lose?

we strategize the bernake win? sure you make money from it , 'cause you're in at the start. but so what?

really. how many times in your life does a play like this come up?

game on?

:)

Sun, 05/13/2012 - 01:20 | 2420756 Youri Carma
Youri Carma's picture

Bailout #2 Could Cost Up To 56% Of German GDP” when we explained how in a daisy chain collapse of European countries which could only be sustained, paradoxically, by an exponential expansion in the EFSF, could result in Germany easily footing 32% of its GDP (and in reality up to 56%) in “contingent liabilities

Roughly 50% of German GDP already “sunk” will only get bigger and bigger, until finally there is no choice for Germany but to pull the plug. Germany too has finally discovered that when it comes to numbers, no amount of rhetoric can change the final outcome .

So, Please, Please Don’t Eat The Daisies

Sun, 05/13/2012 - 07:32 | 2420864 dizzyfingers
dizzyfingers's picture
Waving the White Flag

A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools. - Douglas Adams, The Hitchhiker's Guide to the Galaxy

For quite some time in this letter I have been making the case that for the eurozone to survive, the European Central Bank would have to print more money than any of us can now imagine. That the sentiment among European leaders was that they were prepared for such a move was clear – except for Germany, which is haunted by fears of a return to the days of the Weimar Republic and hyperinflation.

When Germany agreed to a fixed monetary union and a European Central Bank, it was with the clear understanding that it would be run along the lines of the German central bank, the Bundesbank. The members of the Bundesbank and the German members of the ECB were most outspoken about the need for a conservative monetary policy that would keep a clamp on inflation.

However, as I have previously noted, the Bundesbank was a toothless tiger. Germany has two votes out of 23 on the ECB, and the loud drumbeat from most of Europe, which is experiencing the difficulty of austerity accompanied by too much debt, is for a far more accommodating ECB.

The simple fact is that Mario Draghi, the Italian president of the ECB, created €1 trillion euros to help fund European banks, which promptly turned around and bought their respective countrys' sovereign debt. Germany's Angela Merkel forced the Bundesbank to "play nice" and go along with what was seen as the only way to solve a growing banking crisis in Europe. Everyone breathed a sigh of relief, thinking that this at least bought a year during which things could be sorted out. But it turns out that a trillion euros just doesn't go as far as it used to. The "relief" lasted about a month. The last few weeks have presented yet another budding crisis, as least as large as the last one. Where to get the next trillion?

This week the German Bundesbank waved the white flag. The die is cast. For good or ill, Europe has embarked on a program that will require multiple trillions of euros of freshly minted money in order to maintain the eurozone. But the alternative, European leaders agree, is even worse. Today we will look at the recent German shift in policy, why it was so predictable, and what it means. This is a Ponzi scheme that makes Madoff look like a small-time street hustler. There is a lot to cover.

At the end of the letter I will mention a few upcoming speaking engagements, in Atlanta, Philadelphia, and a webinar I will be doing next week. Now let's jump over to Europe.

Waving the White Flag

It is the world's worst-kept secret: Germany does not want inflation but wants to abandon the European Union even less. And as we will see, the eurozone simply does not have enough money to keep itself together without massive ECB intervention.

"Cry havoc," wrote Shakespeare in Julius Caesar, "and let slip the dogs of war." The military order "Havoc!" was a signal given to the English military forces in the Middle Ages to direct the soldiery (in Shakespeare's parlance "the dogs of war") to pillage and incite chaos.

The cry is much the same in Europe today, though it is not the dogs of war that will ravage the land but the hounds of inflation. The English edition of Spiegel Online today carries a story with the headline "High Inflation Causes Societies to Disintegrate."

Spiegel Online explains:

"'Inflation Alarm!' reads the front-page headline in Bild, Germany's biggest selling newspaper. "How quickly will our money be eaten up?" the paper continues on page 2. "Millions of Germany [sic] are worried: Inflation is returning!" Just in case the message wasn't clear enough, the article is illustrated with a picture of a 1-trillion-mark note from 1923, the high point of German hyperinflation.

"The fact that Bild, arguably Germany's most influential newspaper, chose to run with the story in its Friday edition shows just how deep-rooted Germans' fears of inflation are. Nine decades later, the hyperinflation of the early 1920s still haunts the country.

"The panic-mongering was prompted by a statement by a senior official from the Bundesbank, Germany's central bank, to the finance committee of the German parliament earlier this week. Jens Ulbrich, head of the Bundesbank's economics department, said that Germany is likely to have inflation rates 'somewhat above the average within the European monetary union' in the future and that the country might have to tolerate higher inflation for the sake of rebalancing national economies within the euro zone.

"Ulbrich did not give concrete figures in his statement, saying only that it was important that inflation in the euro zone as a whole continues to remain stable, even if it rises in some countries and falls in others. Observers believe the Bundesbank may be reckoning with an inflation rate of around 2.5 or 2.6 percent."

If only they could be assured that inflation would be so mild. It is already at 2.1% in Germany. On Thursday, Finance Minister Wolfgang Schäuble, heretofore an inflation hawk of the old Bundesbank school, told reporters that inflation could go as high as 3 percent. "As long as we are ... in a corridor between 2 and 3 percent …we are in an area that is still acceptable," Schäuble said.

Bild wrote in the actual editorial:

"For 10 years, the euro was very stable and had lower inflation than the deutsche mark. But now the worst part of the financial and euro crisis is coming: creeping currency devaluation and inflation which could possibly continue for years. That's how counties want to wash away their debts. But it mainly affects (blue-collar) workers, employees and retirees. They are precisely the people who have borne the burden of solving the crisis and who have kept a cool head. That's unfair….

"Inflation gnaws at our trust in money, in our most important institutions, in politicians and in the central banks, which in German are dubbed 'guardians of the currency' for a good reason. Because they experienced it so bitterly, Germans know that in the end high inflation causes societies to disintegrate. It robs the individual of trust in the future, without which no country can thrive."

What brought on such a remarkable display of German forbearance? The threat of a complete eurozone collapse, brought on not just by Spanish banks (the present culprit) but what appears to be the dawining realization that this is about more than just Spain or Greece or Portugal or Ireland.

Viva Los Rescates Financieros de los Bancos

I have been writing for almost two years about the fact that the cajas, or Spanish regional banks, are worse than bankrupt. US banks are shut down when their nonperforming loans are at 5% of their capital. Spanish banks are at 20% and rising rapidly. My coauthor Jonathan Tepper and I spent a whole chapter in Endgame on Spain, at the end of 2010. This week the Spanish government basically nationalized Bankia, the nation's 4thlargest bank, which had been cobbled together from seven failed cajas and given a large government guarantee and a €3 billion public-offering equity infusion. Only roughly half of its real estate loans are generating returns, and that is the number for public consumption.

"Aside from creating a financially unsound bank, the government also demanded an additional 30 billion euros worth of write-downs on loans – valuing 84 billion euros in total, when combined with the original requirement of 54 billion euros in write-downs. The combined write-down program is, however, unlikely to be sufficient to address the close to 180 billion euros in toxic assets held by Spanish banks. Furthermore, many of Spain's struggling banks will be unable to maintain the core tier-one capital ratio required by EU regulations without the government's assistance. Spanish banks will require an estimated 100 billion-250 billion euros in recapitalization later this year to reach this capital ratio target – a significant percentage of which will have to be shouldered by Madrid.

"The government takeover of Bankia is a clear policy reversal for the conservative administration of Prime Minister Mariano Rajoy, who for months insisted that no additional public funds were needed for the banks. Intervening on Bankia's behalf demonstrates the failure of Spain's banking consolidation strategy." (Stratfor)

We are talking the need for new Spanish-government debt amounting to roughly 25% of GDP that will be needed just this year, and that's if things don't deteriorate beyond present assumptions in their real estate sector. Care to make a wager on how sound those assumptions are? About as sound as Rajoy's assessment, only a few months ago, that no public money would be needed, perhaps?

Let's do some basic math. Spanish banks took down some €352 billion in the LTRO (created by the ECB), or over 1/3 of the total amount. They have about€80 billion left after deposit outflows and buying sovereign debt. Which will be needed to buy yet more Spanish government debt, so they can be bailed out.

As near as I can tell, Spain is guaranteeing about $20 billion of the new IMF funds that will be used for a European bailout. Spain already has $332 billion of liabilities to the ECB, $125 billion to the stabilization fund, another $99 billion for something called the Macro Financial Asset Fund, and various guarantees for other bank and European funds, all of which totals over $600 billion, give or take. Their public debt-to-GDP ratio is only 69%, but add in these other guarantees and commitments and you get over 130% debt-to-GDP. And that is before they start bailing out their banks, and before any additional debt from their fiscal deficit, which is running at 8%.

(Yes, I know they say it will be around 5%; but they are in a deepening recession; unemployment is rising at an alarmingly high rate, which lowers revenues and increases government spending; and their bond costs are rising. Care to take the over/under bet on, say, a 7% fiscal deficit? You get to be the under. Hmmm, I don't see many hands out there.)

Look at this chart of ten-year Spanish bonds:

Notice that rates came down when the LTRO was issued and Spanish banks had the money to buy Spanish government debt. Why would they buy it? Because they got to borrow money from the ECB at 1% for three years and could make a very fat spread. Making a "free" 4% is a tried and true way to garner profits that can be used to offset losses.

Once the LTRO was done, Spanish interest rates began to climb. Note that they only briefly dipped below 5%.

I think I have this straight. Spain wants to guarantee more bank debt that the banks will use to get more money from the ECB, which will in turn be invested in Spanish bonds that will provide the money to run higher deficits, which will…

This is somewhat like a destitute bar patron guaranteeing his friend's tab so his friend will buy him more drinks. The ECB is the bartender. European taxpayers are the bar owners. We know who pays the tab in the end.

Contagion is Real

It seems quaint that only a few years ago the concern in Europe was that there would be "contagion" risk resulting from a Greek default. So worried were they that we had almost-daily pronouncements that Greece would not be allowed to default, that there was no need for a Greek default, the developed countries no longer defaulted, etc. Now that Greece has defaulted, the line in the sand is "That was just Greece; no other country will need to default."

But just in case, European leaders created all sorts of funds, guaranteed joint and severally, to help bail out nations in trouble. First Greece, then Ireland and Portugal. Even with all the money that was raised, it was not enough to prevent a Greek default. And the "new" debt is trading at around 10% of what the original was … as I was predicting two years ago.

The austerity that was forced on Greece has resulted in a backlash from Greek voters. The two ruling parties, basically run by two families, had traded control of the government back and forth for 50 years. Last week they could not even get 33% between them. In fact, no coalition can be cobbled together from any of the splinter parties. There will now be new elections, probably in June. Looking at the early polls, it is probable that a coalition will form that will reject the enforced austerity. Which will of course mean that Greece will not get the European funds it needs to be able to pay for even the austerity programs. Which will make things worse and hasten the departure of Greece from the euro.

Europe and the euro can survive without Greece. They could even make it without Portugal. Ireland will merely default on the debt it incurred from the ECB to bail out its banks, but will want to stay in the eurozone.

But the euro needs Spain, to maintain a credible standing, or so Germany evidently believes.

It Doesn't End With Spain

The next usual suspect is Italy. And indeed Italy will soon be paying 5-6% of GDP just to cover the interest on its debt. If it were not for interest, they would have an actual government surplus. While they are making progress, a European recession is not going to make it any easier.

Let's move on from Italy. Let's consider France. They just had an election, and to no one's surprise they voted a Socialist into the office of president. And it appears likely he will get a majority in the legislative branch as well, giving Hollande control of the government. What he says he will do is get things under control by raising taxes to cover about 40% of the deficit and cutting spending to cover the other needed 60% – although he has not said what he will actually cut. He has pledged higher taxes on business and top earners (75% taxes on earnings over €1 million), subsidies for companies taking on younger and older workers, a partial reversal of the rise in the retirement age to 62, a promise to hire 60,000 new teachers, and he will take longer to get the budget under control than the current agreement with the EU allows.

Brussels issued a rather stern warning today, asserting that France must comply with the agreed-upon budgetary terms, which will require a lot more taxes and/or cuts than Hollande is willing to do. And whatever he decides, he has no easy task. France's acknowledged, official debt-to-GDP is 86%; but when you include their various commitments to the ECB, the ESFS, ESM, EIB, etc., the number rises to about 146%. Not all of that requires France to make the interest payments, but just to cover any losses in case of a default. But that 86% number is rising rather rapidly.

And their problems are not a short-term cyclical issue. They have committed to relatively larger entitlements and pensions than even here in the US! And those bills are coming due in the same time frame as in the US. It does not get any easier, and the French are notoriously unwilling to accept cuts in pensions or labor conditions. Want to touch agricultural subsidies? Want to see more tractors and burning tires on the Champs-Élysées? Just saying.

France has not balanced its budget since 1974. Note that the budget deficits are over 8% for the last few years (but not as bad as US deficits!), and now they have a negative trade balance. (chart from my friends at GaveKal)

Hollande campaigned explicitly on an anti-austerity platform. Angela Merkel campaigned for his opponent, Sarkozy. Not exactly the basis for a lasting friendship. And the rest of Europe is watching closely to see how this all works out. What will Germany do? Louis Gave (living in Hong Kong but still very French) writes:

 

"Assuming this program [Hollande's pledges to increase spending, raise taxes, etc.] ends badly, then France will need friends. Fortunately, the head of the IMF happens to be French, though this may be a double-edged sword, as Christine Lagarde cannot be seen giving France a privileged deal. In light of this rhetoric, and his promise of more spending, it is hard to think that Hollande and Angela Merkel will become fast friends. Meanwhile, Hollande's promise that his first act will be to pull France's troops out of Afghanistan is unlikely to endear him to the US administration. In short, France will soon need friends, but those may be as rare as an interesting French presidential candidate. Meanwhile, we have to hope that, like Groucho Marx, Hollande is a man who will declare 'These are my principles and if you don't like them, I can change them.'"

The Economist recently wrote:

"Although one ratings agency has stripped France of its AAA status, its borrowing costs remain far below Italy's and Spain's (though the spread above Germany's has risen). France has enviable economic strengths: an educated and productive workforce, more big firms in the global Fortune 500 than any other European country, and strength in services and high-end manufacturing.

"However, the fundamentals are much grimmer. France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country – more even than in Sweden. The banks are under-capitalized. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France's big cities. Exports are stagnating while they roar ahead in Germany. France now has the euro zone's largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not anymore. Indeed, a sluggish and unreformed France might even find itself at the center of the next euro crisis."

The banks of France are over 4 times the size of French GDP. The markets have been punishing the larger banks, with some of them down almost 90%. Look at this graph for Societe Generale:

While French banks are not the problem that Spanish banks are, they are far larger relative to the size of their home country. Even a small problem can be large for the country. And French banks have very large exposure to European peripheral debt. A default by Spain would push them (and a lot of other European banks) over the edge. Which is one reason that Sarkozy was so loudly insistent that any bank problems should be treated as a European problem and not the problem of the host country. (Interesting idea if you are Irish!) France simply cannot afford to deal with any problems in its banks while it is running such large deficits. And not while it is guaranteeing all sorts of European debt, which is at the heart of the problem. Germany needs France to help shoulder the financial burdens of Europe. And as long as France can keep its AAA rating, Germany has a partner. But if France loses that rating, then any European debt it guarantees clearly loses that rating as well.

S&P has already taken France down one notch to AA+ and still has a negative outlook. Moody's has warned of a possible downgrade to France. Italy now has a BBB+ rating, just below that of Spain. When you look at the actual balance sheet and total debt, France is not all that far from further downgrades, unless it embraces a new budget ethic, which is precisely what Hollande has said he will not do.

That would be a real crisis for the eurozone. German voters might not be willing to shoulder the European burden without a full partner in France. And if France had to guarantee a great deal more pan-European debt, while it continued to run deficits and, God forbid, had a crisis in one or more of its banks, it would be putting its credit rating at risk.

Is there any wonder about the timing of the Bundesbank retreat? They looked at Greek and French elections and then at the ongoing Spanish crisis, which is trending from very bad to awful with a risk of horrific. They glanced at the balance sheets of their own banks and those of French banks vis-à-vis sovereign debt from peripheral Europe, then took a peek at German-voter polls and flipped through their own balance sheet, and decided that the only entity with enough money to stem the crisis was the ECB. And that means a "little" inflation.

I think the vast majority of Germans (and to be fair, the entire world) have no idea how many trillions of euros are going to be needed to keep patching the leaky ship that is the eurozone. It is even possible that most German politicians actually think it might only be 3% inflation.

Spain is too big to save and too big to fail. The only way for Spanish debt to remain at 6% is for the ECB to basically buy it (or lend to Spanish banks so they can buy it, or whatever creative new program Draghi and team can think up). When Spain goes, it is just a matter of time before we lose Italy and then, yes, even France. The line must be drawn with Spain. And the only outfit with a balance sheet big enough that can also do it in a politically acceptable manner is the ECB, and the only way they can do it is with a printing press.

Will it buy time? Yes, but time for what? To fix government deficits? To deal with bank debts? Sovereign debt? To somehow solve the massive trade imbalances between Germany and the European periphery? To force voters to accept a fiscal union? In the midst of a crisis? If there is some conspiratorial cabal that has a secret plan, they have kept it well hidden. Because from here it looks like they are making up the "plan" as they go along.

Their actual intentions are no secret. They will do whatever it takes to keep the European Union and eurozone together. And whatever it takes is a very open-ended plan. But it is going to cost them trillions of euros.

Someone is going to have to pay that bar bill. And there's going to be one helluva hangover.

Sun, 05/13/2012 - 11:22 | 2421116 DanDaley
DanDaley's picture

Remember that the Weimar inflation was a deliberate policy (to lower their debt burden through increasing exports and tourism) that got out of hand. Wonder if it will work out the same way this time -best of intentions...straight to hell! 

Sun, 05/13/2012 - 12:09 | 2421207 Herkimer Jerkimer
Herkimer Jerkimer's picture

Kermit the frog here!

 

The muppet!

 

What I'd like to know, is some sort of best-guess-time-line, along with the idea of a comparison to the Weimar Republic's strategies and the eventual decline into hyperinflation, on how long this mess is going to take to implode.

You boys are all smart enough at ZeroHedge. Let's start game playing some potential directions, getting the conspiracy wall-of-stickies-and-drawings with lines on it, like the detetive shows on tv, to flesh out a strategy to be able to prepare for this from a perspective of North American US/Can dollars.

 

I'm seeing disaster, but I don't know what to do.

 

•J•
V-V

Sun, 05/13/2012 - 14:04 | 2421539 DanDaley
DanDaley's picture

Prepare for the worst: food, shelter, clothing, and protection, both physical and financial...all to the degree that you can.  What all that means is the point at which everybody gets creative with what they have and can imagine.  I'd bet all the Fed, Citibank, and JP Morgan, etc. execs have well stocked cottages out in the boonies somewhere.  When you see them blowin' town (or rather don't see them around), then it's time to keep your head down.

Sun, 05/13/2012 - 15:41 | 2421782 WallowaMountainMan
WallowaMountainMan's picture

one for the history books. nice job zh

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