Say you are the CEO of Deutsche Bank (whoever that may be these days following Ackermann's stunner of an announcement yesterday), and you have so much dirty laundry that if the market so much as looks at you funny, you know very well it is game over the second you have to engage in reactionary damage control. After all your assets are 84% if not more, of total German GDP and there is no way that you can be bailed out by one country alone, even if that country is the only one that is not a complete Banana republic. So what do you do? Why you tell your bankers to write the best, most persuasive pitch book they can come up with, addressed to none other than Goldman Sachs alum and ECB head, Mario Draghi, and you tell him the truth: "Europe has hit its Tipping Point" and it is now or never. In other words, in 51 slides, your task is to convince the ECB that unless they terminally break away with their traditional stance of not monetizing, not only they, but the entire European status quo will cease existing. And that's precisely what you do. Behold: "The Tipping Point - Time To Call The ECB" - Deutsche Bank's definitive attempt to encapsulate the Mutual Assured Destruction that we are "certainly" all going to suffer, unless the ECB prints, and prints, and prints. The bottom line, you would tell Draghi, is "do nothing, and pull the cord now; or do something, risk hyperinflation which may or may not come, but at least extend and pretend for a few years." And one wonders why Crude is about to pass $100...
Cutting straight to the chase, here is Deutsche Bank's summary conclusion on why the Tipping Point is here:
- Markets have lost confidence in the EU's institutional structures and framework
- Italy represents a critical new and dangerous phase of the crisis (the "Tipping Point")
- Italy and Spain have € 300 bn and € 120 bn of 2012 issuance (€ 930 billion combined over next 3 years)
- Italian sovereign bond market is broken
- The "stakes" have never been higher (including the fate of the Euro itself)
- Politics has become “the” obstacle: All 5 "peripheral" countries have had leadership change in 2011
- The economy (recession) has become “the” unknown variable
- Continued Euro bank sector de-leveraging likely under almost any scenario (over $2 trillion estimate for next 18 months)
- Longer term, external (current account) deficits matter more than fiscal deficits
And here is what DB thinks has to be done right now.
- More progress on credible fiscal austerity (especially Italy)
- Rapid resolution of the EMU's original sin - lack of fiscal integration (Dec 9 EU Summit meeting)
- Restore confidence to re-open bank funding markets
- Time to expedite the "Grand Plan"
- Larger Greece debt restructuring
- Bank capital raises and debt guarantees
- Additional bail-out funds for Greece
- Time to call the ECB
- Investor reluctance on EFSF € 1 trillion leverage plan
- Ineffectiveness of ECB monetary policy transmission mechanism to keep bond yields low
- Adjustment away from current bond purchase program needed (away from temporary, limited and sterilized)
- ECB should announce large, targeted buying plan (i.e. € 200 bn over 12 months)
Or advice (as always): buy. gold. now. (and not the MF Global paper version, please)
Takeaways from the SNAFU are hardly surprising:
But the risks remain considerable:
And returning to a much discussed topic - why has the EUR held up so strong?
But there is plenty of downside risk to come potentially: