Why German Tempers Are Finally Boiling
Back in July of last year, before it was even remotely acknowledged (and in fact it was roundly denied) that Greece would set a debt haircut precedent, which despite all the rhetoric has merely given all the other PIIGS ideas about debt haircuts of their own (and how to achieve these as fast as possible), Zero Hedge was the first media outlet to cut to the truth, with "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." Note we said "soon to be" because it was obvious that the modestly complicated math of Germany bearing the cost of keeping the Eurozone alive would take quite a while to trickle down to the common German man. We did, however, underestimate the Bundesbank's mathematically helping hand in the form of one chart, most recently observed here, which makes the math far clearer than anything we could ever do to explain: namely the exponentially grown Bundesbank TARGET 2 balance, which is essentially Germany's way to fund, via the ECB, account imbalances across the Eurozone (explained in gory detail here), and put the national economy on the hook in ever greater amounts to a sudden and disastrous collapse of the Eurozone, because should a fat tail even occur, a solid 25% of German GDP would be Corzined. Today, The Telegraph's AEP does a bring down on the current status of this one biggest wildcard for Europe's future: namely, German anger, or as he puts it "tempers" which it appears have finally begun to boil.
From the Telegraph:
Controversy is raging in Germany over soaring "payments" by the Bundesbank to shore up Europe's monetary system and cope with a tidal wave of capital flight from southern Europe.
Professor Hans-Werner Sinn, head of Germany's IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. "The euro-system is near explosion," he told Austria's Economics Academy on Thursday.
Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day.
"It is a horror scenario," he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped.
Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens.
The furore follows a sharp jump in the Bundesbank's "Target2" claims within the European Central Bank's internal payment network from €547bn in February to €616bn in March. Bundesbank claims have risen sixfold since 2008, a rise mirrored in Holland and Luxembourg.
To paraphrase Hans Gruber loosely, "You asked for miracles, Theo, I give you the Bundesbank"
Ironically, that one chart achieved more than we could ever hope to do in conveying the seriousness of the situation.
There has been a dramatic rise in outflows from Spain, despite the ECB's €1 trillion blast of three-year liquidity. The exodus indicates that the ECB action has so far failed to restore basic trust in Spain's banks.
Critics say Target2 allows the vast sums to pile up for ever, unlike the US "FEDwire" that mandates the settlement of regional imbalances within months.
The Target2 saga has become a daily theme in the German press, with Dr Sinn emerging as a television superstar. The coverage is eroding confidence in the euro. The latest poll shows that 56pc of Germans want a return to the D-Mark.
Bundesbank chief Jens Weidmann has fanned the flames by demanding collateral from weaker states for Target2 transfers. The imbalances are not a problem "as long as the eurozone stays together", he said.
Of course, there are those who still think that debt gets repaid at par even when collateralized with doubly reused condom wrappers:
Professor Karl Whelan from University College Dublin said the debate is absurd, whipped up by populists and the German media. "If the euro breaks up, there are still assets to go along with the liabilities. The likely outcome would be a 'Bretton Woods weekend' with a gentleman's agreement to carve up the losses."
"Even if countries told each other to go to Hell, the euro would simply cease to exist and the Bundesbank could write a cheque to itself. There would be no inflation and no loss to the German taxpayer," he said.
"We live in a world of fiat currencies, not the Gold Standard. People making these claims don't understand how a central bank works," he said. His views are shared by ECB experts.
Oh they understand all right: they understand that the biggest problem in Europe - namely that it has run out of money good assets - is now the problem. And now even the common people get it.
However, the issue has taken on a life of its own in German politics. There is deep concern among German officials that ECB monetary stimulus will leak into inflationary credit within Germany, which has the lowest unemployment in 20 years and an incipient housing boom.
As we pointed out last week, now even Soros is involved.
Mr Soros said EU politicians are "leading Europe to its ruin" by trying to enforce misguided contraction on the EMU weaker states, adding that he would "bet against the euro" if he were still an active investor. His Quantum Fund famously made €1bn betting against sterling and the lira in 1992, a gamble triggered by Bundesbank comments at the time.
Even defenders of Target2 admit that such vast transfers need proper scrutiny. The International Monetary Fund said the system is a back-door means of financing the trade deficits of Italy, Spain, Ireland and Portugal.
Dr Sinn's IFO Institute has refused to back down. Its latest report said Target2 violates democracy. "Who are the losers from this process? The savers in those remaining European countries that still have sound economies," it said. They have been pledged their assets "without their knowledge or consent".
"This enormous international credit should have been subjected to the parliaments of Europe," it said.
In the meantime, and as also suggested here first, the best way to bring the current flawed system to a crushing collapse is ironically to do nothing. Courtesy of exponential charts like the one above, which by definition are unsustainable, two things will happen: 1) what is unsustainable will not be sustained, and will crash and burn, and 2) the more the common people look at charts that go vertical, and guarantee massive net worth losses in the future, the more tempers will boil, until finally the anger takes to the streets.