Germany

Dear Santa, I know Christmas is a long way off, but I was hoping that you could get me a European Bank License and another round of LTRO.   I promise to be a good boy, and borrow as much money as the ECB will possibly give me, with minimal equity, and buy as much 3 year in and in paper as I can.  I’m afraid I might not be able to bring myself to buy Spanish or Italian debt, but with the broad range of assets available against the money, I’m sure I can find something I like.  I’m not greedy, I don’t need to make 2% of carry, I would be happy with 1%, after all, I my only qualification is having a bank license, and I have no real equity in the deal (though after 3 years if all goes well, I will be a very rich man, or bank).

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...European banks are three times larger than the European sovereigns, the ECB is not the Federal Reserve Bank of the United States, the leading economy in Europe, Germany, is 22% of the economy of America, that there are ever and always consequences for providing free money, that Europe is in a recession and it will be much deeper than thought by many in my view, that the demanded austerity measures are unquestionably worsening the recession and increasing unemployment, that nations become much more self-centered when their economies are contracting and that the more protracted all of this is; the more pronounced Newton’s reaction will be when the pendulum reverses course.

Haven't learned a thing. 

Earmuffs time for our German readers.

Yesterday following the S&P announcement of the Greek 'selective default', we had one simple question to the ECB:

Today we get the answer.

Et tu, Brute!

Could Sweden or Finland be the scene of the next European financial crisis? It is actually far likelier than most people realize. While the world has been laser-focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place. Nordic and Western European countries such as Norway and Switzerland have attracted strong investment inflows due to their perceived economic safe-haven statuses, serving to further inflate these countries’ preexisting property bubbles that had expanded from the mid-1990s until 2008. With their overheated economies and ballooning property bubbles, today’s safe-haven European countries may very well be tomorrow’s Greeces and Italys.

Banking privacy is dead. Completely, totally dead. Murdered, really. The US government is the assailant, and FATCA is the murder weapon. We’ve talked about this a few times before– FATCA is the heinously insidiously piece of legislation that the Honorable Barrack Hussein Obama passed into law in 2010 as part of the “Hiring Incentives to Restore Employment Act”. There were no hiring incentives, and there was no restoration of employment. But any vestiges of banking privacy were destroyed. In brief, FATCA has two key concepts. First, it requires an additional (and completely unnecessary) layer of reporting from all US taxpayers who have ‘foreign financial accounts’ at ‘foreign financial institutions.’ Though as we have discussed before, both of these critical terms are ridiculously and flagrantly ambiguous, putting the onus entirely on the taxpayer. The second key issue is that FATCA puts a burden on ALL foreign financial institutions worldwide to enter into an information-sharing agreement with the IRS; this essentially obliges every bank on the planet to submit reports and customers’ private data to the IRS.  Such provisions are absolutely, 100% impossible. And it’s becoming clear that FATCA was passed with no intention of being enforceable. It’s inconceivable that every institution on the planet could enter into an agreement. And it’s inconceivable that every institution on the planet could possibly know whether every other institution has entered into the agreement. The only thing FATCA has accomplished is scaring the living daylights out of non-US banks. So much so that foreign banks have approached their governments to ask for help.

Will Germany go “all in” on the Euro experiment? I doubt it. In fact I’ve found the “smoking gun” the little known act that Germany has recently implemented that proves the country has a Plan B that involves leaving the Euro with minimal damage.

With the second version of the ECB's enhanced LTRO (back-door QE) starting tomorrow, there has been a great deal of speculation on what the take-up will be, what banks will do with the funds they receive, and more importantly how will this effect global asset markets. SocGen provides a comprehensive top-down analysis of the drivers of LTRO demand, the likely uses of those funds, and estimates how much of this will be used to finance the carry trade (placebo or no placebo). Italian (25%) and Spanish (20%) banks are unsurprisingly at the forefront in their take-up of ECB liquidity (likely undertaking the M.A.D. reach-around carry trade ) and have been since long before the first LTRO. On the other side, German banks have dramatically reduced their collective share of ECB liquidity from 30% to only 6%. SocGen skews their detailed forecast to EUR300-400bn, disappointing relative to the near EUR500bn consensus - and so likely modestly bad news for risk assets. Furthermore, they expect around EUR116bn of this to be used for carry trade 'revenue' production which will however lead to only a 0.6% improvement in sectoral equity levels (though some banks will benefit more than others), as they discuss the misunderstanding of LTRO-to-ECB-deposit facility rotation. We, however, remind readers that collateralized (and self-subordinating) debt is not a substitute for capital and if the ECB adamantly defines this as the last enhanced LTRO (until the next one of course) then European banks face an uphill battle without that crutch - whether or not they even have collateral to post. Its further important to note that LTRO 2 cannot be wholly disentangled from the March 1-2 EU Summit event risk and we fear expectations, priced into markets, are a little excessive. We suspect this will not be a Goldilocks 'just right' moment.

It was only logical that following this weekend's quote unquote surprise announcement by Juncker that a third Greek bailout is likely in the cards, that Angela Merkel would follow up during her much anticipated Bundestag speech today and tell fellow politicians that there is no guarantee that a Greek bailout will work. That was to be expected. That this announcement is somehow responsible for the market selling off, and the EURUSD being at the lows of the day, once again proves that the market is no longer a discounting mechanism, and merely reacts to headlines that could be anticipated by anyone who steps back from the blaring noise and flashing headlines for even just one minute.

A big reason for the dour mood overcast on the market this morning is the failure of G-20 to resolve latent funding issues, with the IMF demanding more money from Germany for a global firewall, and Germany demanding more money from everyone else. A way to summarize events is that in lieu of any credible collateral left (the bulk of it has and will be pledged with the ECB in its discount window, aka LTRO operations, to keep Italian bonds bid and thus perpetuate the fallacy that things are under control), the world is now running out of ideas how to even kick the can down the road. Which is not a good sign as much kicking remains with tens of trillions in debt rollover coming up in the next few years. Below is Art Cashin's summary of this weekend's disappointing G-20 weekend retreat in Cabo san Lucas, which enjoyed the scenery but did nothing to easy the confusion over who pays for what in the next few weeks.

With an economy of just $3.2Tn versus the United States $14.3Tn Germany is trying to prop up a Eurozone that is more than one trillion dollars bigger than America. They just do not have the resources for the task they are undertaking and I predict serious consequences, eventually, from their efforts. Germany is “best of class” and will be the last to go but they cannot evade the European recession in the end and I think it is only a matter of time and unfortunate decisions before the austerity demands made on so many will wind their way back home to those who made the demands. They used a timeline that was much too short for the job at hand and payment will eventually be forced upon them. They obviously get the joke where Eurobonds and other ploys of this nature average the economies of Europe and the standards of living over some period of time so that Germany, in the end, will suffer most as they have the furthest to fall. They have approached the G-20, China, the emerging market countries and all polite responses to the side; the results have been about zip. The Germans are running out of both time and money and Franz is squirming in the beer hall.

That the German vote to pass the second Greek bailout package would be problematic is an understatement. Even as German parliamentarians are expected to pass the latest (but certainly not last as the G-20 meeting over the weekend demonstrated) hurdle to fund the Greek rescue, new revelations out of Greece have come to light exposing the true degree of capital flight out of the country, spearheaded by none other than the country's own corrupt politicians. Kathimerini reports: "As a political outcry grew on Friday over the revelation that an MP had transferred 1 million euros out of the country in May when authorities were struggling to appease Greek citizens’ fears of the repercussions of a possible default on their savings, Finance Minister Evangelos Venizelos told Parliament that a significant number of lawmakers had moved sums in excess of 100,000 euros out of the country. Earlier, addressing a cabinet meeting, Venizelos had told fellow ministers that there are several public figures among the Greeks who transferred a total of 16 billion euros abroad over the last two years. According to research conducted by the Finance Ministry’s information systems department, 9 percent of this money ended up in Swiss bank accounts." As such, it is obvious why German popular tabloid Bild has called for German lawmakers to reject the Greek bailout: at this point the farce is arguably too much for everyone, and the situation is playing out just as predicted here back in July. Merkel is due to address the Bundestag at 3 pm local time, or in just over an hour. Those curious about the blow by blow, can follow the developments out of Germany at the following live blog by Bild.