Schadenfreude Is a German Word

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,

Is the German Pot Calling the PIIGS Kettle Black?

We seem to get the daily barrage of messages and soundbites out of Germany demanding that countries stick to existing plans and that “austerity” is the only way forward.  Germany continues to love to point the finger at the other countries and accuse them of borrowing too much and that these countries need to suck it up and pay what they owe.  For now we will ignore the fact that Germany itself was one of the first countries to break the Maastricht Treaty. What Germany seems to be forgetting is that they jeopardized their own credit quality.  With bunds at record lows, this may not be obvious, but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing. 

I have argued since the beginning that all these guarantees were dangerous.  Guarantees are more dangerous than CDS since it is truly impossible to figure out how much debt has been guaranteed or how likely the guarantees are to be honored.  Zerohedge and Mark Grant (amongst others) have done a lot of work on the true size of various countries’ obligations.  Here is an estimate of what Spain's read indebtedness is. <>   I don’t completely agree with the numbers, but the point is extremely valid.  Looking at just the debt outstanding for these countries is very misleading.  Some account of their off-balance sheet, unfunded commitments and obligations needs to be taken into account.

Which brings us to Germany.  Germany is the ultimate backstop and seems to have forgotten that debt exists in two states. 

Debt is either Repaid or It Isn’t

There are only two outcomes when you lend money.  You either get repaid what you lent based on the original contract or you don’t.  It doesn’t matter why you don’t get paid what you expected, whether it is because of forced redenomination, restructuring, or default.  What matters is that you don’t get paid.

So while Germany is drawing a line in the sand, they seem to have forgotten the borrowers have two choices.  Germany seems to be under the impression that no matter what they say or do these other countries will pay their debt.  That Germany can cave in and let the other countries spend and grow and let the ECB provide immense liquidity and get paid.   Or that Germany can remain firm on austerity and a deal is a deal rhetoric and still get paid back.  But what if they are wrong?

What if at some point Greece, or worse, Spain or Italy finally say they have had enough of the finger pointing and blame game and are going to redenominated and stop certain payments altogether?

How much is Germany on the Hook For at the ECB?

If countries are leaving the Euro and the ECB is no longer going to be their central bank, the bonds held by the ECB in the SMP portfolio will be hit.  With over €200 billion of SMP bonds, a 40% loss due to redenomination seems reasonable.  That is an €80 billion hit to the ECB.  The ECB cannot handle a loss of that size without either printing massive amounts of money or making a capital call on the member states.  It would be ironic and nonsensical to print money to fund the loss, since the ECB could have printed less money and not had the loss in first place.  On the capital call side, obviously the PIIGS aren’t making it.  I think a lot of the other smaller members may choose not to as well, since the ECB is joint and several.  I’m not sure even France would participate.  The uproar in France that Germany drove the situation to this point may be enough to get them to demand that Germany pick up the lion’s share of the tab?

Then what happens to all the bonds being held at the ECB via LTRO and other facilities?  The ECB holds government bonds, they hold bank bonds guaranteed by the government, and may even hold bank bonds outright.  They will need to make margin calls on these facilities.  Will all the banks be able to meet the margin calls?  No.  The weakest banks have already used the LTRO more than other banks. They are extremely leveraged and have no money left to meet those margin calls.  If any governments had provided guarantees on their debt, now would be a great time to revoke those.  Why take more losses for a bank that’s going down, when you can change the law and jam the loss onto the ECB?

I find it hard to believe that the losses at the ECB won’t be at least €100 billion and could easily be more.  The liabilities are joint and several but could fall heavily on Germany.

How much is Germany on the Hook For via the EFSF and EU and IMF?

The EFSF has €110 billion of debt outstanding.  That money in theory has been lent out to various countries.  The EFSF will have losses and I expect those losses would be greater as a % of notional than the ECB’s since more of the EFSF exposure is to Greece where the losses will be highest.  In theory Germany is only obligated to make good on their “portion” of the debt.  But if they do that, will other countries honor their commitments?  I cannot imagine Spain and Italy will make payments on the debt that is outstanding even though they are guarantors, once they have gotten to the point of leaving the Euro. 

While Germany may decide to pay the ECB money regardless of the cost, it might be easier to let EFSF bond holders take losses rather than adding more debt and taking on more responsibility than they are legally obligated to pay.  The EFSF bonds remain horribly over rated as they don’t account for how likely the guarantees are likely to be revoked or not paid when called upon.  The EFSF will only make calls against guarantees once the situation has turned nasty, so the rating should reflect that.  If you believe the countries are going to leave the EU, the EFSF bonds are a great short.

There are EU direct loans.  More losses for Germany and France.  There are costs of running the EU, to the extent one still exists.  More of those expenses will have to be picked up by the remaining members (somehow it feels like there won’t be any remaining members once this process starts).

The IMF is likely to come out best in terms of any loss on existing holdings, partly because they have been more conservative in their lending practices, but mostly because the countries will need them to provide additional loans after they exit.

 almost forgot the EIB and EBRD.  Hard to believe that this won’t create more demands for money from Germany?  Possibly small, but the hits against Germany are starting to add up pretty quickly.

How bad will German Bank Losses Be?

The partially state owned bad bank, Commerzbank had big write-downs in Greece.  Hard to imagine that they avoided even taking bigger exposures in Spain and Italy.  Then there are the German worse banks or Landesbanks.  They had some of the largest exposures to Greece.  It would be simply shocking if they didn’t have even bigger exposures to Spain and Italy.

These banks had enough “capital” or government support to make it through the Greek PSI process, but can they withstand hits of 10%-50% on their Spanish and Italian holdings?  I highly doubt that without another huge infusion from the German government.

Then what about Deutsche Bank?  By far in the best shape, but maybe you remember they were the first bank that Spain provided verbal guarantees in respect of regional debt.  Why would Spain possibly honor that guarantee when they are abandoning the Euro and need all the money they can spare?  What is Deustche Bank going to do?  Repossess Catalonia? 

The PIIGS will all walk away from any guarantees they have made.  That is even easier than stopping payment on bonds or forcing through a new currency.  This will hit banks more than countries, but the losses may be so big that it makes it back up to the country level.

How bad is the Target2 hit?

I have read a decent amount on this and remain confused.  At one end, are arguments that the risk is massively overstated and losses would be minimal.  Frankly I have found those article rely too much on the same hope that was evident during PSI, where ECB bonds get paid par, because that’s what they get.  I think once countries are in full on exit mode, niceties like that will be thrown out the window.  At the other extreme is arguments that the full size of Target2 balances would be at risk.  Those articles honestly seem to be more realistic.

Target2 could cause more massive losses, and at the same time could force trade to grind to a halt.  I think the trade disruptions in any case will be critical and the Target2 system breaking down would add to that problem.

Countries in Glass Houses Shouldn’t Throw Stones

No wonder Josef Ackermann came out in favor of more support for Europe.  He has the good sense to see how bad this is.  I have focused on Germany here since they alone seem to believe that they can push the situation to the brink, get paid, and have no trouble, but if the defaults start (whether payment defaults or currency redenomination) then France and the other countries will be hit hard.  France has its own set of Dexia guarantees and who knows what exposure their banks have to Spain and Italy?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
JamesBond's picture

master plan bitchez

Marginal Call's picture

The solution is easy.  Every month, every man, woman, and child in Greece takes a 20 Euro note, wipes their ass with it--and sends it to Germany.  Everybody happy.  Germany gets da money, Greeks get revenge.  Win win. 

JPM Hater001's picture

Just another inch to the left Mrs merkel...keep going...dont worry about the ledge it's feet take a nice big step

OttoMBMP's picture

So, dear Peter. What do you want to tell us?

That Germany should have never engaged in "saving the Euro"? I fully agree!

But you know, Peter. We are the bad guys (worldwars and stuff - as you know, only (!) the baaaad Germans have been responsible for these baaaad things). And of course we had to "save the Euro", this great invention of Jacques Delors. And bail out the banks and "social" systems and mediterranean lifestyles German workers never had dreamed of.

And the German politicians had to somehow sell these guarantees and payments to the German voters. That's how "austerity" has come into play. "We pay, but not without demanding disciplined behaviour."

Of course, this could not work. And of course Germany will go down with the rest of the EUSSR empire.

But how do you explain your Schadenfreude, Peter?

malek's picture

You know, it's all Bush's... err, I mean ze Germans fault!   <roll eyes>

RMolineaux's picture

In my opinion, the only course of action that might forestall total collapse is to take the following steps, which must begin in the U. S.:

1.  Nullify and outlaw all credit default swaps.

2.  Arrest and prosecute those bankers who have failed in their fiduciary duty and confiscate their bonuses.


FranSix's picture

Ok.  So Germany will be facing the same banking sector crisis as some of the other Eurozone countries.  And, as we are hearing that the proposed solution is to provide gold-backed bonds out of the ECB with the underlying asset formed out of Eurozone gold bullion contained in various central banks, then Germany, in order to participate,will be required to repatriate its gold from NY vaults.

Slope of Hope's picture

Won't they be surprised when they go to get their gold and find out the locks have been changed!

mayhem_korner's picture



Or that they find a "caution: wet paint" sign in a distinctive shade of yellow hanging on the door...

FranSix's picture

Or, after months of wrangling finally get their gold, but with 2012 or later refinery dates stamped on the bars.

bigdumbnugly's picture

"Germany is the ultimate backstop and seems to have forgotten that debt exists in two states - Debt is either Repaid or It Isn’t"

c'mon, haven't you heard of schrodinger's debt?

JPM Hater001's picture

"Okay, I have a solution for your problem, but it only works with spherical chickens in a vacuum."

mrktwtch2's picture

the market is getting bored with the euozone is collapsing about ufo's over new

hedgeless_horseman's picture



Look at US treasury prices and USDX.  The market is clearly not bored with the eurozone collapse.

Don't ever forget, the USDX is a weighted geometric mean...

Euro (EUR), 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight

Synchronized diving means we must all go down TOGETHER.

Mark my words, Timmy Geithner and Ben Bernanke will be considered early American heros of the Great Resource Wars.  Don't believe me? Just compare gasoline prices in Europe and America.

God save the petrol dollar!

Lednbrass's picture

The main reason for the price difference is taxation, the Europeans put  massive taxes on it to fund their social programs.  Theoretically they could choose not to and reduce the price but their governments use energy as a cash cow.  Many in the US government would love to move in that direction, there is a segment of the American left that very much wants to make it prohibitively expensive.

smb12321's picture

US government?  There's a huge segment on ZH that trashes any form of energy stronger than campfires (the Luddites / anti-industrialists / survivors).  We've had horror stories of possible nuclear plant problems, fracking problems, oil spills, gas leaks - you name it.  GW excels in such agitprop.

giovanni_f's picture

When the squids will have finished unloading their long used toilet paper alias us treasury instruments to the extent of being materially net short used toilet paper alias us treasury instruments you will know that the "markets" alias globalized run-by-squid casinos anticipate a "solution" to be at hand in the not too distant future. Until then the "markets" will continue to bash Europe. And fuck you, NSA.

t_kAyk's picture

Debt is either Repaid or It Isn’t

It isn't. 

LawsofPhysics's picture

correct.  This is what "borrowing from the future" looks like when you finally get to the "future".  History has shown how this ends time and time again.  Just once it would be nice to see the paper pushers lose their heads again.

Anyway, hedge accordingly.  If only we knew what the Dollar to SDR exchange rate was ahead of time.  That is where this is all going, well that or WWIII.

Soul Train's picture

fight now, zero hedge.

If you can't fight, then flush and wash.

DaveyJones's picture

 "but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing"

you mean financial contracts still mean something?

t_kAyk's picture

HO HO HO!!  Presents for ALL the good little boys and girls! 

Although in Germany, and all Alpine countires, they also have the 'Krampus'... 

Krampus is a mythical creature recognized in Alpine countries. According to legend, Krampus accompaniesSaint Nicholas during the Christmas season, warning and punishing bad children, in contrast to St. Nicholas, who gives gifts to good children. When the Krampus finds a particularly naughty child, it stuffs the child in its sack and carries the frightened child away to its lair, presumably to devour for its Christmas dinner. 

Peter Pan's picture

The word debt contains the word bet. The lenders now have to recognise that they have lost their bet. Can we now move on to the other issues such as demographics, corruption, totally skewed income and wealth distribution?

Tirpitz's picture

Rolled over. After a voluntary haircut, which still brings the vultures that scooped it up for pennies on the dollar a two to three hundred percent gain. Taxfree and offshored.

Colonial Intent's picture

"you have enemies? good, that means you stood up for something in your life"

Winston Churchill


Cognitive Dissonance's picture

Germany is simply the more buoyant turd in the toilet bowl at the moment. That will change soon enough.

Just keep flushing boyz. Sooner or later you'll realize you need to use the hard core bleach.

Hard core cleaning

wcvarones's picture

"Schadenfreude Is a German Word"


So is Scheisse Porn.

Nussi34's picture

and Franzosenschwuchtel!

junkyardjack's picture

I learned from Michael Lewis' Boomerang that Germans are fascinated with shit.  Well they are about to get a storm....

Sandmann's picture

Michael Lewis is a twerp who think Americans say "Shit" and that is okay but if Germans say "Scheisse" it has some psychological aspect.  Then again Lewis used to be obsessed with big swinging dicks

Let The Wurlitzer Play's picture

The analysis of Germany has been long overdue.  I personally dont believe they are as stong as their bond yields imply.


Tirpitz's picture

Actually Germany may be way stronger than most of us expect. They carried Europe after the first world war, after the second world war, and now again. If the banking system could be thrown into the gas chambers and instead manufacturing had some say, success would be within reach.

Sandmann's picture

They carried Europe after the first world war


You have a Doctorate in Counterfactual History ?

BudFox2012's picture

They are simply the best of a bad lot, and their bonds are strong for the same reason the dollar has been gaining strength: no other viable alternatives.

adr's picture

Along with other mysteries I would like to know the answers to:

Why did Facebook pop $.60 this morning on no news?

Why does oil seem to sell of by $3 every night between 12AM and 7AM only to drive all the way back up by noon?

Natural gas now really trades based on weather forecasts?

Debt is actually wealth?

Liabilities are actually assets?


I don't recognize the world.

Bartanist's picture

From what I recall, Bush/Paulson & Obama/Geithner & Berstinky threw around a lot more in guarantees than slop at a pig farm. Germany has a bunch of catching up to do to be in the big league.

However, unlike the US, Germany is a net creator of value. Maybe they can actually afford it without spending $1.5 trillion more than they have each year to support the banking and military crime syndicate.

walküre's picture

I know what's going on here. Germany is being forced into another TOTAL CAPITULATION!

Give it all up Germany, give it all up so the rest of Europe can feed off your every man's, woman's and children's BLOOD.

3rd time is the charme. Wall Street's endgame is always to fuck Germany and take all their stash. The parasite is obviously going after the meatiest host after all the other hosts are devoured and turned into zombies. Germany has to fight the zombies and kill the parasites. I see many sequels to this ancient story.

Lednbrass's picture

Yep, that about sums it up.  I just hope the Germans still have enough left in them to give the rest the finger after being bombarded with guilt for 60 years and propagandized into the same state as the US population.

The US pursued the same postwar strategy in Germany that they did the American South- denationalize the young, effeminize the males, take over the schools and tell them their history and culture are very very bad, hammer them with propaganda and undermine anything traditional or family based.

My grandfather used an old expression for needing some luck and would say "Du musst schwein haben" (dont know if that is still in use over there), its time for the Germans to reverse that and now say "Wir mussen keine schweine haben" and let the PIIGS gorge themselves on the food of whatever fools give them money.

Mercury's picture

I mentioned yesterday that Soros's point that it was first  Germany who insisted, after the Lehman collapse, that each sovereign was responsible for it’s own banks, which is when non-German EU (particularly Italy and Spain) sovereign debt started to trade wide. 


This also had the effect of defining the limits of the EU project, which is still in a state of confusion: what exactly are sovereign liabilities and what are (or should become) those of the EU.

walküre's picture

Saving Lehman would have been allot cheaper than putting trillions of bailout cash into the manure spreader to feed the pigs at the trough.(not PIIGS).

Mercury's picture

It just would have let the music play a bit longer.
There are still way more asses than chairs circling the world and not much has been fixed or even addressed in the way of the size, cmplexity and collateral moneitzation of our now even Too Bigger To Fail financial institutions.

But eventually the music will stop.

BandGap's picture

Coming soon to a theatre near you.

Spain isn't going to pay squat. You know it, I know it and Germany knows it.  This is like your jobless brother in law coming back for another loan (hit) while you stupidly thought he was going to come by and square your previous loan with him. The asshole just can't find a job, has tapped out his friends and family and knows you are holding.  And it happens again and again. At the same time you cancle your vacation with the wife and kids, you put off that new car and start worrying about the costs for retiring.  And he not only doesn't repay you, the SOB is asking for more. Eventually the SHTF, right?


Treeplanter's picture

Yeah, and the jerk reeks of pot smoke and  ddn't even bring a joint over.  Now he's high grading your fridge. 

CatoRenasci's picture

So, the Germans either take a bad hit now when the PIIGS renege, or a much greater hit later when the PIIGS renege after the Germans have pledged even more of their future and sent more of their money and creditworthiness to enable the PIIGS to live high on the hog a bit longer.

Hmmm. When you're in a hole, the first thing is to stop digging. Germany should leave the Euro first and be done with them. Lend only against gold or other movable collateral.

Marginal Call's picture

Movable collateral?  Germany has been trying to move it's borders for a 100 years.   Everything is "movable". 

CatoRenasci's picture

All the European powers have tried to move their borders, using war, for hundreds of years. The only European states that haven't are the Swiss - pretty much content in their mountain redoubt - and the various 'postage stamp' states like Andorra, San Marino, Liechtenstein, Luxembourg and Monaco.

The Germans are hardly more culpable on that score than anyone else.  Alsace and Lorraine were very much German from the time of the beginning of the Holy Roman Empire until Louis XIV took them for France in the late 17th century. They'd been French for only a couple of hundred years when the Germans took them back in 1871.

The Austrians, the Italians, the Spanish, the Poles, the Russians, the Turks, the Hungarians, the Swedes and the other Scandinavians, have all busily tried to move their borders for centuries, with more or less temporary success.

This time the Germans should just insist on the gold.

antin's picture

In fact, all movings of borders in central Europe in the last 100 years have been territorial losses of Germany, with the last big one moving the Polish border 100 km to the east of Berlin. So much for that.


rwe2late's picture

Debt is either Repaid or It Isn’t!

Is it really so simple as that?

If some entity could "print" dollars at virtually no cost,

then lend it to me at near zero interest with no collateral,

and after which I could loan it to you at, say 8% interest for real collateral,

As long as you paid the interest (forever), I wouldn't really care whether you repaid the principal or not, unless perhaps I wanted to possess whatever you  signed off as collateral. 


The Reich's picture

 Merkel is our new 




to finally destroy the City.


You're not scared, are you?

Tirpitz's picture

Highly scared of the Ferkel's looks.