Germany Folding? Europe's Insolvent Banks To Get Direct Funding From ESM

Tyler Durden's picture

We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?

Here is Deutsche Bank's Jim Reid redirecting attention back to where it was all throughout the summer and fall of 2011, until the new Goldman-based head of the ECB relented days after his appointment:

Of major Western developed countries, the UK now joins Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia as being in recession. By the time the data comes out next week its likely to be followed by Spain and remember German GDP was negative in Q4 and is expected to be flat in Q1 so its not impossible that they will also follow. Most other countries in the West are currently not far off recession so more may join the pack this year. Perhaps the furthest away from recession is the US and it is no co-incidence that of the countries in our sample they have the combination of having a high deficit and one that is reducing by far less than virtually all their peers. Those in recession either have a much lower annual deficit or have seen their deficit shrink more aggressively.


So if you had an argument against our shorter business cycle theory for the US then you might state that they don't yet have a fiscal straight jacket and therefore still have flexibility to avoid a recession. Back in 2010 we thought it was unlikely that they could survive through to 2013 without a recession but clearly much depends on fiscal and monetary policy going forward. The election in November could be key here. Has the US been proved right and everywhere else proved wrong? Or is it just that the US has more international financial credibility that allows it to run higher deficits than other countries? If others copied the US then maybe a debt crisis would have occurred. Which to be fair is what has happened in many areas.


However if you wanted to be optimistic for those in recession, could we eventually look back on this week as being a pivotal one where the authorities finally realised that austerity without unconditional monetary support at this point in the structural cycle is detrimental to growth? One of the things we mentioned on our conference call earlier this week (replay details at the end) was that amongst the current renewed evidence of renewed economic weakness and political turmoil (in Holland and France) then maybe Europe would finally start to appreciate that they have the wrong policies in place to keep the crisis at bay. So its possible that we may get a different political agenda in Europe emerging. Indeed Merkel caught the mood yesterday as she suggested that austerity alone will not resolve the crisis and added that “we need growth in the form of sustainable initiatives, not simply economic stimulus programs that just increase government debt”. However its all very well saying that you want growth but its another thing achieving it. We're not sure what can be done in a deleveraging world to actually get decent growth outside of increasing Government spending which isn't going to happen for obvious Sovereign crisis avoidance reasons. Maybe a slower pace of cuts helps but it doesn't mean growth will be aggressively high. We can't help thinking a much weaker Euro would be the best thing for growth on the continent. However that probably only happens with a much more aggressive, unconditional and consistently intervening ECB. If we had that maybe Europe could get higher growth.


So maybe we may be starting to see the origins of a different political emphasis emerging towards growth but we're scratching our heads as to how you actually get that. If it were that easy wouldn't every government always have a bias to promote it anyway??


As discussed the US stands apart for the time being and yesterday FOMC meeting showed again a slightly more upbeat economic assessment from the Fed. The Committee noted signs of improvement in the housing market and the decline in unemployment rate although inflation has picked up somewhat. The first rate hike forecast date was brought forward a bit with only four members projecting that it would come after 2014 (previously 6). What got the market excited however was another dovish performance from the Chairman. Bernanke said that “we remain entirely prepared to take additional balance sheet actions if necessary”. So further easing is certainly possible if data flow starts to turn south. In the past our economists have suggested that the Fed is from Venus and the ECB from Mars. While this gap between the planets has narrowed in the last 6 months we still think it is a fairly good reflection of the DNA of the respective institutions. As we mentioned above an unconditional ECB is probably what Europe needs now given the austerity drive.

So what happens next? This (via BBG):

The European Central Bank and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism, Sueddeutsche Zeitung reported.


The working group will examine how banks can directly access the funding within the next two weeks, the newspaper said. The move comes amid growing concern that Spanish banks are increasingly unable to lend to companies and that the crisis may spread to other euro countries, SZ reported.

And google translated from the original:

Germany rejects a direct lending to European banks of the ESM categorically. Finance Minister Wolfgang Schäuble (CDU), had declared at the weekend that he would not discuss it. The contracts would see such an option not available, and while it will remain so. Bundesbank President Jens Weidmann said the SZ, while the supervision was higher than the banks in the nation-states, this was crucial to take the responsibility if some banks need additional capital. Moreover, should continue to apply the principle that ESM loans only to the fulfillment of strict macroeconomic conditions and a "self-help" give.


"Liability and control shall be in any allocation of aid credits remain in balance," said Weidmann. The Netherlands, Austria and Finland reject the direct allocation of funds from ESM to banks. From the environment of the bailout fund was rumored that such plans were difficult to enforce.


Strapped banks are likely to continue to negotiate directly with the aid of ESM, the countries of the Euro-club rules would give up their previous part. These stipulate that only governments can apply for assistance, regardless of what they use the loans. The same goes for Bank assistance. There is also money from the ESM only applicable if the government comes up with an austerity and reform program in return. This was a crucial precondition for the approval of the German ESM.

In other words, everyone is once again protesting on the surface, for purely political and populist reasons, not to mention not attracting the attention of the German media once again, as the country just happens to be the biggest source of cash to the ESM: add that to the recently exponentially rising TARGET2 counterfunding by the BUBA and once can see why voters would be furious. And yet, underneath the surface more preparations are being made to debauch the EUR. The irony of course is that the EURUSD is actually up on the news as it removes some of the near-term threats to insolvent Spanish banks. Obviously the plan does nothing for the longer-term viability of Europe's insolvent financial system. But at least the can is kicked into the future, and by then it will be some other minister's problem.

Which is what this farce is all about.

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Nussi34's picture

Why don´t they just bomb the failed banks and the PIFGIBS and start from scratch?

Colombian Gringo's picture

Agreed. Better yet, toss all of the euro politicians and ruling elites into jail, along with the rapists and pedophiles.

Nussi34's picture

I  feel sorry for the rapists and pedophiles for having such bad company!

Rip van Wrinkle's picture

Well the Yanks and the Brits and the Froggies seem to like bombing everywhere else so why not??

orangegeek's picture

Using debt to pay debt has driven markets from the March 2009 low to where we are today.


And there are those calling this a bull market - more like a correction in down market that's hung on for more than three years.


Like anything, this too is a process and the process of markets toping is showing - more easily seen when using elliott wave.



OldPhart's picture

Somewhere in Europe some asshole is depositing a load into the proberbial fan.

I wish I could stand far enough back to avoid the effects.  However, the fan will spew this load across the globe.

falak pema's picture

you are doing a good job living up to your avatar.

Keep up the good work; your hot air is better than the banksta concoction we have to breathe day in day out. 

EmileLargo's picture

Barclays is probably just as critical and just as leveraged. But as it sits in the UK and backed with a government's willingness to print unlimited fiat, people haven't focused on it as much.

schatzi's picture

But isn't Bob Diamond getting 25 million? So things must be going great for them. Much much better than DB. No?

UGrev's picture

I give up on humanity..  we are slaves to but a few hundred and we sit by and say "Thanks for the lube job?" 

resurger's picture

Just default mother fuckers

Irish66's picture

how is lucent not halted?

the tower's picture

The ESM is the final step in taking away financial independence from the member states.

The board of the ESM can demand what it wants, is not required to give openness and is not accountable.


You hate the FED? This will be EUROFED squared.

Central Bankster's picture

Svee vill not monetize!

falak pema's picture

Hollande of France says he will ask ECB to print and be on same page as FED. As per the Nomura presentatation there is room for more liquidity in the ECB pump, that is the official view in Keynesian circles in Euro zone.

How will the European banks deleverage their awesome private debt, in a recession economy, all the while taxes are raised, and what efficacy does this liquid pumping strategy have on macro economy is NOT CLEAR.

"Ringa ringa roses..." seems to be Europe's favorite song! 

Richard Koo: The World In Balance Sheet Recession - Business Insider

DutchDude's picture

When the sheeple wake up and realise their politicians sold them out to an immune ESM, demanding tax/debt money within 7 days to give to bastard banks..... i do NOT wanna be a politician!

Ghordius's picture

I told you europe has many, many plans! Did you read the new FT comment, btw?

"The Bank of England must unleash more QE" By Chris Giles

GeneMarchbanks's picture

That's no news, Mervyn always leads the way; it's why they call him King.

Meanwhile continentals just have to worry about the Spain shaped piñata that is about to get wacked in anticipation of more LTRO goodies. I have my doubts as to whether it's being done blindfolded however. That, and Hollande, so far he seems like no Leroy Jenkins.

Ghordius's picture

don't get me started, hedgless, don't get me started on this City of London request...

Bicycle Repairman's picture

"Do you understand this graphic ?"

It means "who could have seen it coming", "everyone's to blame" and "think of the children".

Sandmann's picture

I have told you Tyler several times to watch the new Aufsichtsratsvorsitzender of the Deutsche Bank, Dr Paul Achleitner who moves from Allianz SE to Deutsche Bank in May 2012

€4,113,000 Comp

Dr. Paul M. L. Achleitner has been a Member of the Board of Management at Allianz SE since January 2000. Dr. Achleitner served as Head of Group Finance of Allianz SE. Dr. Achleitner served as a Director of Future Unit at Oesterreichische Nationalbank. He served as Vice President, Mergers & Acquisitions of Goldman Sachs & Co., New York, from 1988 to 1989. He was a partner of Goldman Sachs Group from 1994 to 1999. Dr. Achleitner served as Boston Manager, Strategy Consulting ... of Bain & Co. from 1984 to 1988. He serves as Chairman of the supervisory Board of Allianz Europe B.V. He serves as the Chairman of Allianz Dresdner Asset Management GmbH. He serves as the Chairman of Allianz Elementar Lebensversicherungs-AG, and Allianz Elementar Versicherungs-AG, and also serves as Vice Chairman of Allianz Investment Bank. Dr. Achleitner served as the Chairman of Goldman, Sachs & Co. OHG, Frankfurt, Germany. He served as Deputy Chairman of Supervisory Board of Man SE from June 4, 2003 to June 3, 2005. He has been a Member of the Supervisory Board of Osterreichische Industrieholding AG since June 9, 2002. He has been a Member of the Supervisory Board of Bayer AG since April 26, 2002 and Daimler AG since April 14, 2010. He serves as a Member of Supervisory Board of Leverkusen, Munich; Allianz Immobilien GmbH and ADAM AG. Dr. Achleitner serves as a Member of the Supervisory Board for Allianz Finance B.V. He serves as a Member of Supervisory Board of RWE AG, Allianz Deutschland AG, Allianz Global Investors AG, and Allianz Lebensversicherungs-AG. He served as Executive Director, Investment-Banking of Goldman Sachs International, London from 1989 to 1994. He served as a Member of the Supervisory Board at Oesterreichische Indholding AG since June 9, 2002. He served as a Member of Supervisory Board of Man SE until June 3, 2005. Dr. Achleitner served as a Member of Supervisory Board of Bayer Schering Pharma AG. He serves as a Member of ÖIAG, Vienna. He serves as a Member of Shareholders Committee and Finance Committee of Henkel AG & Co. KGaA Vz. His Membership of Official Bodies includes: Takeover Board (Übernahmerat) of the Federal Financial Supervisory Authority (FFSA); Stock exchange specialist commission, Federal Finance Ministry; Deutsches Aktieninstitut (German Equity Institute) and Government Commission German Corporate Governance Code. He is Honorary Professor of WHU Koblenz. Dr. Achleitner studied Business Administration, Economics, Law and Social Sciences at University of St. Gallen and earned First Degree and Doctorate from Harvard Business School  (last sentence inaccurate btw)


He will shake Merkel up and down to get more funding. He is Goldman. He designed parts of the ESM. He will of course know Mitt Romney very well

wandstrasse's picture

One more part of the worst scum the planet has ever spawned.. was really close to puking when I read this bio.

Sandmann's picture


The creditors of peripheral eurozone countries such as Greece prefer a “work-out” over time to the US-style haircut that the financial markets increasingly demand. The reasons are clear. These states’ biggest creditor is the European banking system, including private institutions already struggling to meet increasing regulatory capital requirements and central banks, especially in the countries most affected. A stiff haircut – it would need to be about 50 to 60 per cent to be effective – would require governments to recapitalise part of the banking system, again increasing the sovereign debt burden. Add market speculation on who might be next and the temptation for other debtors to soften the blow by opting to “burn the bondholders”, and it is clear why

In addition, the ESIM could aid the exchange of existing Greek bonds at a discount for newly issued, much longer duration ESIM-insured bonds, insuring part of the principal and/or the coupon payment. Investors would choose either to trade out of the existing risk and take a voluntary “haircut”, or to keep the bonds and hold them to maturity. A voluntary scheme like this could significantly ease Greece’s solvency problem.







Bicycle Repairman's picture


And thus the real plan emerges.  Make the titles of the officials and the names of the bailout programs so long that Germans cannot read them without their heads exploding.

Sandmann's picture

OK let's get long-winded....Chairman of the Supervisory Board

Ghordius's picture

Aufsichtsratsvorsitzstellvertreter der Donaudampfschiffahrtsgesellschaft? ;-)

aaaargh... splatter

q99x2's picture

Impeach Schauble. Arrest and handcuff him. Throw him into prison. Bring back the draft in Germany.

NorthPole's picture

It's either: a) Germany folds and ECB starts printing en masse or b) Germany exits the Eurozone. There's no third way out. They can't simply sit on their asses and do nothing - the crisis, as it unfolds, will force their hand.

I think option a) is far more likely. Why? Because the German politicians and bankers, or to keep it short the German elite, have much more in common with the int'l elite than with their own country and its citizenry. Just like everywhere else, there are no mainstream political parties that would simply say 'lets do what is good for Germany'. They all say 'let's do what's good for Europe'.

Sandmann's picture

with the int'l elite than with their own country and its citizenry


German Politicians see themselves a Virtuous Caste and as Jailers for their People........and always have. 

They have deigned to publish Mein Kampf in 2015....not because the Freistaat Bayern has had a change of heart, but because the copyright runs out in 2015........they will simply bow to the inevitable long after it was available free on the Internet.......funnily enough, only after Salafists started handing out free copies of the Koran to Schools and German public on street corners !

Watson's picture

The ECB will print without limit under both scenerios. It's just that under (b) the EUR will not just be devalued, but subject to additional capital flight into DEM's.


ATM's picture

There is no option B. 

The only option is A. Europe will print and they will end up racing the rest of the world to the bottom. Everyone will be told the answer is to grow out of the problem and the place to grow will be exports of course. And to export more the currency must be weak. And to weaken they will print, everywhere and in massive amounts.

Dr.Engineer's picture

To all Germna readers, what is your take on this? 

What are the legal challenges that the German people can make against their corrupt head pigitician, Merkle?

What are the chances that Germany will give in?

ATM's picture

The chance they give in is 100%. The Germans will end up leading the charge screaming "Print!"

NorthPole's picture

Your first question is moot. The law doesn't matter. What has to be done will be done regardless.

Your second question: 90% imho. (i am an optimist).

Vince Clortho's picture

There is no "way out".  There is only delaying the inevitable.  They will (and have been) printing their brains out, because it is buying them some more precious time.  That is what this whole stinking scheme has come down to.

In the global financial cartel, there is no such thing as "German leaders looking out for the best interest of Germany". The Central Bankers and their political puppets have allegiance only to their own Club.  


Quinvarius's picture

It has gotten so bad that their primary goal is now to keep all the money they print out of the public's hands.  Free money for the criminals.  Fake austerity, which is really permanent recession, for everyone else.  All in the vain gamble they can slow the onset of hyperinflation they are causing.  Every recessionary blip they cause gives them the confidence to print more.  But it the hyperinflation is going to come right on schedule. 

Bicycle Repairman's picture

That's it.  And the banks tell the criminals where to spend the money.  So far the criminals have largely cooperated.

Quinvarius's picture

Why would the central bankers do anything other than set the EUR/USD higher on this news?  I have long since given up any belief that currency markets are anything other than a tool of central bankers.  If you want to trade currencies, you have two choices:  Long physical gold or long some piece of paper.  And all the paper is exactly the same as long as central banks are rigging the currency markets.  

Clowns on Acid's picture

How does one say ZIRP in German ?

i-dog's picture

Drucken, Arschloch, Drucken!

Bicycle Repairman's picture


The word is not long enough.  At least 3 times as many letters.

I'm thinking more like:


lizzy36's picture

Liquidity isn't capital.

What the EU banks need is Capital. Which means massive dilution.Which means NO bank C-suite will voluntarily do this bc all their personal stock will be worth pennies on the dollar.

Sandmann's picture

Hell, they've diluted mine to hell already from 5.6 billion Shares in Issue in 2007 to 69.5 billion in 2011

Lloyds Bank does D I L U T I O N  - once the 6th SAFEST Bank in the World......until Management drank Kool-Aid

malek's picture

 Perhaps the furthest away from recession is the US

He surely meant to say "Perhaps the most advanced in gaming the inflation numbers, and thereby the GDP numbers, is the US"