Why Launching The EFSF Means Career Suicide For Merkel And A German Political Crisis

Tyler Durden's picture

After disclosing first that the EFSF could end up amounting to anywhere between 36% and 133% of German GDP in the form of contingent liabilities, depending on whether or not France is downgraded from AAA and whether the EFSF is raised to its proper size of €3.5 trillion, we speculated that life for German chancellor is about to become a living hell as the realization that Germany is forced to rescue all of europe permeates political discussions. The FT now confirms that this is indeed the case, and could be coming to a head much faster than expected. From the FT: "Battle lines are being rapidly drawn up in the German Bundestag for what promises to be a bruising debate over the crisis measures to stabilise debt markets in the eurozone. Angela Merkel, the chancellor, and her finance minister Wolfgang Schäuble face a revolt among their own supporters in both the Christian Democratic Union and the Free Democratic Party, junior partner in the ruling coalition in Berlin, over the deal they agreed last month with their 16 eurozone partners in Brussels." Add this latest political uncertainty to the possibility of the EFSF being scuttled before it even launches in September to concerns over just how bad the reality in Italy is, and one can see why French CDS just hit a record, and Italian banks are being serially halted.

More from the FT:

The German government is also facing a highly critical press in the wake of the weekend decision by the European Central Bank to buy Italian and Spanish bonds, a move that was welcomed by Berlin, although it is opposed by the Bundesbank, Germany’s highly independent central bank, in Frankfurt.

 

The calls for an emergency party conference have come from the Hesse state branch of the CDU, and from the head of the party’s youth wing, Philipp Missfelder, who is a member of the party’s national executive.

 

In an interview with the mass circulation Bild newspaper on Tuesday, Mr Missfelder said he would call for an emergency party conference at the next meeting of the executive on August 22, if Italy were forced to seek help from the eurozone rescue fund.

 

“The party has a right to participate in such momentous decisions,” he said. But he left an escape route for the party, because Italy is technically not getting help from the EFSF rescue fund, but from the European Central Bank.

The bottom line will be a trade off between a political suicide for Merkel and a bailout of the euro.

Ms Merkel insists that she will deliver her majority in favour of the deal. If more than 21 supporters refused to back the deal, she would be forced to rely on the opposition SPD and Greens, both of whom are in favour. That would ensure German approval for the eurozone reform package, but it would be politically devastating for the chancellor not to be able to count on majority support from her own ranks, and could cause the government to fall.

Too bad CDS-quanto straddles are out of favor, because a German-Italian CDS/EUR FX fat tail blow up bet here would be one of the most profitable trades when all is said and done, as either German default risk surges or the euro is over.