Germany

As the Germans ponder the truthiness of Greece's planned austerity measures it will perhaps come as a shock to many that since the start of the Euro (Dec 1998), Greece (followed closely by Spain and Ireland) has experienced the highest nominal GDP growth rates (rebased to USD) among a sample of large global economies (ex-China). As Deutsche Bank's Jim Reid points out from this surprising fact, these three nations (and to a lesser extent Portugal) have been major beneficiaries of the Euro and have seen their economies improve their international wealth position at a faster rate than their developed market peers since 1999. In the current environment, post the leverage super-cycle, this creates stress (as is all too obvious) and in the medium-term we would expect mean-reversion of this 'fake' wealth/growth. The dilemma is whether the peripheral nations see large and negative GDP growth to revert down or if Germany is willing to accept far higher growth and inflation (maybe 7% nominal) to adjust upwards to the seemingly unsustainable levels of the peripherals. Austerity versus Growth/Inflation. It seems from Ireland's suffering and Greece's slide that the former (peripheral deleveraging and austerity) is the path chosen for now though ongoing appetite (Papademos/Samaras aside) for this seems as unpalatable as German's accepting socialized losses via firewall and the specter of high inflation.

With nothing but mute silence out of Germany in the aftermath of last night's "historic" Greek vote, the EURUSD is getting nervous trading down to just above 1.3200 minutes ago, well below the level reached last night following the passage in the Greek parliament of the vote with 199 out of 300 votes. As such, everyone is starved for some clues of what Merkel and Germany thinks at this point - will they simply leave Greece to flounder, by demanding even more "reality" and implementation of measures from the first bailout - something Greece obviously can not do? Or will Germany relent for at least one more payment (of €210 billion). We don't know, at least not yet. But the following Spiegel interview with German Foreign Minister Guido Westerwelle may provide some insight. The key part: "Q. The second aid package will presumably be more expensive than anticipated, partly because the Greeks haven't kept their promises. How much longer will the German public put up with this?...Westerwelle: It's undoubtedly a moment of truth for Greece. If a sustainable and correct course is set in Athens now, Greece can expect our support -- but only then. There will be no more advance payments. Only actions count now." Like we said, hardly the ringing endorsement people expect. Then there's this: " I am more than dissatisfied with the political impasse in Greece in recent weeks. I'm also addressing the German opposition when I say this: You can't solve a debt crisis by constantly incurring new debts." And yet that is precisely what Bailout 2 is doing as we have patiently explained over and over. Yet Guido said something else which may be of interest to everyone else in Europe: "I don't want a German Europe. Q. What do you want? A. A European Germany." Aaaand, enter lost in translation interpretations.

When discussing the Greek vote to pass a request for cash which is based on nothing substantial but merely more pledges to fix its economy in exchange for fresh billions in secured debt (aka bailouts) which will prime at least 136% of the country's GDP with a direct lien, we said all that matters is Germany's response. In which case ths following statement from German FinMin Schauble is likely indicative that this time around Greece will need to literally move mountains to convince Europe it will comply. From Reuters: "Greek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a "bottomless pit" has to dramatically change its ways, German Finance Minister Wolfgang Schaeuble said. In a hard-hitting interview with the Welt am Sonntag newspaper, Schaeuble also said it is up to Greece whether the country can stay in the euro zone as part of its efforts to restore its competitiveness. "The promises from Greece aren't enough for us anymore," Schaeuble said. "With a new austerity programme they are going to first have to implement parts of the old programme and save." Yet one wonders just how will Greece first implement the measures from the first one if Europe has to vote tomorrow (or Wednesday, it is all a blur now), on ratifying the second bailout. Or was this weekend's entire Greek exercise merely one of complete irrelevance. In other news, we are fairly confident that February budget revenues are going to come in well below projections, and make the already disappointing January numbers seem like gangbusters.

• Greek Parliament Backs Austerity as Rioters Burn Buildings (Bloomberg)
• China CIC Wary of EU Government Bond Investments (Reuters)
• Spain Unions Decry New Labor Rules (WSJ)
• China Tells Banks to Roll Over Loans (FT)
• We're Not Greece: Italian Prime Minister Monti (CNBC)
• Bernanke’s Labor Pessimism at Odds With U.S. Growth (Bloomberg)
• Obama Budget Seeks Funding for Trade Unit (Bloomberg)
• Obama's Election-Year Budget to Target Rich (Reuters)
• China May Need to Fine-Tune Policy This Quarter, Wen Says (Bloomberg)
• China’s Xi Seeks Second Front for U.S. Ties in Return to Iowa (Bloomberg)
• Why Greece and Portugal Ought to go Bankrupt (FT)

The Greek parliament just passed the latest proposed austerity plan with a majority voting Yes. Judging by the reaction of the EURUSD, which experienced a modest 40 pip short covering squeeze in the last few minutes, one would imagine that today's Greek vote outcome is surprising. It isn't: after all, all Greece has done is promise to do something it won't do in hope it can get another bailout package, this time amounting to €210 billion (of which its people will pocket a de minimis 19%). As we said earlier: "The only real questions are i) what the Greek population may do in response to this latest selling out of a population "led" by an unelected banker, which if history is any precedent, the answer is not much, and ii) how Germany will subvert this latest event, and put the bail [sic] back in Greece's court once again." Sure enough, to paraphrase what we said before, the question now is what the popular Greek response will be having learned its politicians sold it out yet again, which will likely be nothing much, as it is 1 am local time, and as everyone knows revolutions in heavily socialist countries only start between 9 am and 5 pm, with a 2 hour break for siesta. More importantly, keep a close eye on headlines out of Germany. That is all that matters now.

Stocks are not the only thing enjoying the ECB's $800 billion balance sheet expansion (and just announced additional Bank of England Quantiative Easing) over the past 6 months. Lately a new and unwelcome visitor has also figured out the Euroean Central Bank's sneaky motives. No, not Germany, they still are hopelessly confused and still believe the ECB is not "printing" money. Nor gold. It did long ago, just as Roubini was calling for an imminent crash following the 200 DMA breach - it is headed over $2000 in short order.  No, this time it is that last entrant to any reliqufication party, who just happens to be the guaranteed party-pooper: gasoline.

Last week, there were relatively few US data releases, but Initial Jobless Claims continued to surprise on the positive side, while U of Michigan Consumer Sentiment saw a small decline. This week, the FOMC minutes on Wednesday with guidance on the Fed's balance sheet will be the key event. Aside from the Fed, there will be many key releases in the US with IP, CPI, and the regional business surveys. The market expects an increase of 0.6%mom in IP, 0.3%mom in CPI, and small gains in the surveys. ?In Greece, negative headlines over the new austerity package on Friday caused some reversal of the rally in the first part of the week, and as a result, we were stopped out of our short $/CAD recommendation (for a small potential gain). However, the Greek cabinet agreed on the new austerity measures late on Friday, and parliament appears to be on track for a positive vote. The Eurogroup meeting scheduled this coming week will be important to watch as well, and Greek GDP will give a sense of the cyclical damage caused by austerity.

Today at midnight local time, 5pm Eastern, the Greek parliament is expected to pass the latest bill finalizing the terms of the second Greek bailout, which as explained yesterday has quietly increased from €130 billion to €210 billion. Needless to say, it will pass, as the opportunity cost for Greece of "pledging" to achieve unattainable targets while doing absolutely nothing, as has been shown repeatedly over the past two years, is zero. The only real questions are i) what the Greek population may do in response to this latest selling out of a population "led" by an unelected banker, which if history is any precedent, the answer is not much, and ii) how Germany will subvert this latest event, and put the bail [sic] back in Greece's court once again.

"The European Union suffers under Germany” ruffled some feathers, but Greek reform rebellion gives Angela Merkel and others what they’ve been looking for: plausible deniability.

Some of our German readers may be laboring under the impression that following the €110 billion first Greek bailout agreed upon and executed in May 2010, the second Greek bailout would cost a "mere" €130 billion. Alas we have news for you - as of this morning, the formal cost of rescuing Greece for the adjusted adjusted adjusted second time has just risen to €145 billion, €175 billion, a whopping €210 billion, bringing the total explicit cost of all Greek bailout funds to date (and many more in store) to €320 billion. Which incidentally is a little more than Greek GDP (which however is declining rapidly) at 310 billion, only in dollars. So as of today, merely the ratio of the Greek DIP loan (Debtor In Possession, because Greece is after all broke) has reached a whopping ratio of 136% Debt to GDP. This excludes any standing debt which is for all intents and purposes worthless. This is secured debt, which means that if every dollar in assets generating one dollar in GDP were to be liquidated and Greece sold off entirely in part or whole to Goldman Sachs et al, there would still be a 36% shortfall to the Troika, EFSF, ECB and whoever else funds the DIP loan (i.e., European and US taxpayers)! Another way of putting this disturbing fact is that global bankers now have a priming lien on 136% of Greek GDP - the entire country and then some now officially belongs to the world banking syndicate. Consider that when evaluating Greek promises of reducing total debt to GDP to 120% in 2020, as it would mean wiping all existing "pre-petition debt" and paying off some of the DIP. Also keep in mind that Greece has roughly €240 billion in existing pre-petition debt, of which much will remain untouched as it is not held in Private hands (this is the debt which will see a major "haircut" - or not: all depends on the holdout lawsuits, the local vs non-local bonds and various other nuances discussed here). If you said this is beyond idiotic, you are right. It is not the impairment on the Greek "pre-petition' debt that the market should be worried about - that clearly is 100% wiped out. It is how much the Troika DIP will have to charge off when the Greek 363 asset sale finally comes. This is also what Angela Merkel will say tomorrow when Greece shows up on its doorstep with the latest "revised" agreement from its parliament to take Europe's money ahead of the March 20 D-Day. Because finally, after months (and to think we did the math for Die Frau back in July) Germany has done the math, and has reached the conclusion that letting Greece go is now the cheaper option.

Heading into the North American open, EU equity indices are trading lower following reports that Eurozone Finance Ministers have dismissed as incomplete a budget presented to them by the Greek party leaders. In addition to that, EU lawmakers have warned Greece of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets. The Greek Finance Minister Venizelos said that Greece must make a “final, strategic” decision Greek membership in the Eurozone over the next six days as it decides on new austerity and reform measures or faces leaving the single currency. However, according to sources, German finance minister told MPs, Greek reform plans would bring debt to 136% of GDP by 2020, instead of targeted 120%. So it remains to be seen as to whether Greece will be able to meet the looming redemptions in March. Of note, analysts at Fitch said that the ongoing Greece talks stating that the country must secure an agreement to cut its debt burden in the next few days to prevent a “disorderly” default.

• Eurozone dismisses Greek budget deal (FT)
• Germany Says Greece Missing Debt Targets in Aid Rebuff (Bloomberg)
• Germans concerned over Draghi liquidity offer (FT)
• Azumi Says Japan Won’t Be Shy About Unilateral Intervention (Bloomberg)
• Schaeuble Signals Germany Is Flexible on Revising Terms of Portuguese Aid (Bloomberg) - food euphemism for "next on the bailout wagon"
• Venizelos Tells Greek Lawmakers to Back Budget Cuts or Risk Exiting Euro (Bloomberg)
• Putin May Dissolve Ruling Party After Vote (Bloomberg)
• HK Bubble pops? Hong Kong Sells Tuen Mun Site to Kerry for HK$2.7 Billion, Government Says (Bloomberg)
• Gross Buys Treasuries as Buffett Says Bonds Are ‘Dangerous’ (Bloomberg)

Remember the pomp and circumstance with which Venizelos showed up in Brussels yesterday carrying a two paragraph statement from Lucas Papademos in hand, saying Greece promises it has agreed to agree to make idiotic "pledges"? Well, as was largely suspected by cynical old us, even that "deal" has lasted not even a whopping 24 hours.

• GREECE'S KARATZAFERIS SAYS CAN'T VOTE FOR TROIKA ACCORD AS IS - BBG
• GREEK FAR-RIGHT PARTY LEADER SAYS ELECTIONS WOULD NOT PROVIDE A SOLUTION NOW, WOULD NEED MORE TIME

This is coming from the LAOS coalition member whose support for the Troika accord was supposedly in place yesterday.Alas, without his endorsement, the whole thing is off. And just to complete the sheer chaos that is about to be unleashed in Greece:

• Greeek far right party leader says asks for reshuffle of Papademos technocrat gov

-> Kiss this whole thing goodbye. Just as Germany wanted all along. And the EURUSD, which lately had traded with the sheer idiocy with which one trades US 3x beta stocks, and which had soared on what was glaringly idiotic hopes that this time, just this time, things in Greece would be different, tumbles.

The situation in Greece has taken a more sinister turn. The outrage in Greece is growing. More and more of the people on my distribution list with ties to Greece are pointing out how bad things are there. Daily life is getting more difficult by the day for most people, yet the EU has told the Greeks that their current offer isn’t enough and that they have doubts about its implementation. At least they got that right, the austerity measures, will not remain implemented. It seems obvious to anyone who hasn’t become locked into a negotiating stance that the whole austerity idea isn’t working. It is possible over the weekend that the Greek parliament will defer to EU demands and vote in a plan that is “acceptable” but I don’t see it lasting. The people are fed up and more and more realize that defaulting and costing the foreign bankers money is worth a shot. Default is NOT the end of the world or of Greece. For all the politicians who keep saying default is the end, they are just wrong. It will cause problems, but Greece will survive, and for the first time can start focusing on a plan to move forward rather than dealing just with problems of the past.