Germany

In yet another confirmation of just who is driving policy in Europe, Handelsblatt has broken news that 3 years after Hank Paulson "forced" US banks to take cash, Germany will follow suit next, and "bailout" the German banking sector by stuffing it to the gills with cash soon to be made even more worthless courtesy of persistent and relentless devaluation as it is used for no productive purposes but merely stave off the inevitable collapse of a financial system so broken it now requires not monthly but weekly bailouts. From the German publication: "the German bank rescue fund Soffin will force ailing banks to recapitalize next year. That's at least out of the draft bill, to be released by the Handelsblatt (Thursday edition), and the Cabinet is to decide the next week. Finance Minister Wolfgang Schäuble (CDU) is following the U.S. example: The US distressed banks were temporarily distressed during the 2008 financial crisis. The banks have since there is significantly more stable than the euro-zone in which the institutions were saved only at their own request the European Banking Eba by the banks of the euro-zone by mid-2012 its core capital to nine percent increase. Institutions that make this not your own to get guarantees from the Soffin." Simply said, because it worked (courtesy of an additional $1.6 trillion in excess reserves used fungibly by banks to plug capitalization holes) in the US, the forced bailout will work in Germany, where unlike the US, the top banks account for about 200% of German GDP. In other words, Germany is about to proceed with an implicit nationalization of its banking sector. Which means that while we thought yesterday that the German AAA-rating is the safest of all in the Eurozone, following this development we will certainly reevaluate.

Germany is interested in the EU as a political entity, NOT the Euro as a currency. With that in mind, consider the following story which received almost NO attention from the media:

Following late November's disastrous 10 year Bund auction, in which the goal seekers saw everything from a failure of the repo market to the Bundesbank trying to fail the auction on purpose, yet which was nothing more than a simple case of little demand and high supply, today, following a steady leak wider in yields in the entire bund curve, Germany sold €4.09 billion in 1.25% 5 year bonds, with the maximum amount of €5 billion selling easily following bids for a total of €8.67 billion. The Buba retained €0.91 billion, which it always does, and is not an indication of some ulterior motive to have the ECB bailout Europe. As expected the Bid To Cover was a soaring 2.1x compared to 1.5x on the last 5 year auction on November 2. In other words, a stunning success and demonstrating what happens when you actually have demand for paper following a decline in prices. Below are the Wall Street responses to this strong auction. So that takes care of that. What is more important, and why futures are down is that as expected, yesterday's deux ex FT was promptly denied by Germany after a "senior German official" spoke to Reuters and said they are "not sure if summit will reach conclusion on using IMF funds in eurozone crisis" and "can't forsee running EFSF and ESM simultaneously". They have also said they are "more pessimistic than last week on overall summit deal". In other words, look for many moresuccessful Bund auctions as things resume their downward trajectory all over again.

Here it comes. From the FT: "Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc. The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days. It warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question. With regard to Germany, S&P said it was worried about “the potential impact (...) of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.” Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc." How this critical news was leaked, we have no idea. However, what is important is that now may be a good time to panic, unless Allianz has another CDO Quadratic plan up its sleeve...

A few weeks ago, SocGen's Dylan Grice released a piece which quickly became a scathing focal point in the inflation-deflation debate, in that he speculated that it was not the Weimar-unleashed hyperinflation (which incidentally is the primary reason why most Germany now dread what the outcome of a profligate ECB would look like) that led to the surge of the Nazi party, but in fact the opposite: the stinginess of German monetary authorities in the 1930s that further exacerbated the situation and helped unleash the Hitler juggernaut. Many promptly took sides in the argument, the bulk of which were shocked that Grice - traditionally a defender of prudent monetary and fiscal policy, would go so far as suggest that it is the ECB's duty to print or else it may justify another "Hitler"-type advent. Well it seems there was more than meets the eye, and in a follow up piece the strategist says: "The purpose of the historical analysis, therefore, was not to reach conclusions about how adherence to hard money principles will linearly lead to resurgent fascism, or war on a par with that seen in the 1930s. Neither was it in any way a defence of Keynesian fiscal activism. It was to illustrate that adherence to even the best principles must come at a price, making a judgment on whether or not that price is prohibitive or not is unavoidable, and today Germany and the ECB have to make that judgment." And his conclusion: "From the beginning of this crisis I've believed the only way politicians will get ahead of it is to bring in the ECB. Since I believe politicians do want to get ahead of it, I expect the ECB to print, and print copiously. I've repeatedly emphasized that printing will solve nothing, beyond buying market confidence for a while... All ECB printing will do is buy the politicians time and space to reset government and private sector balance sheets, to reform how their economies function and be honest with their own citizens. Whether they use that time or not is a separate question (frankly, I'm not hopeful)." But instead of us putting words in Grice's mouth, here is the explanation straight from the horse's mouth. Incidentally we agree 100% with Grice on the issue that eventual printing is inevitable. Which for the TLDR crowd means the entire Grice missive can be summarized as follows: 'buy gold.'

That Commerzbank, effectively Germany most insolvent lender (after the bank that shall not be named because if it falls, so goes Europe) and the first international bank scrambling to demand Discount Window cash from the Fed not in 2008 but all the way back in 2007, is broke is no secret. The only question was when will the bank which is a pseudo-TBTF, be nationalized. According to Der Spiegel the time is rapidly approaching. Specifically, "Germany's government is preparing plans for a potential nationalization of Commerzbank AG, in case the Frankfurt-based lender isn't able to raise additionally needed capital, German magazine Der Spiegel reports Sunday, citing government sources. Germany will reactivate its bank bailout fund, SoFFin, to acquire additional shares in Commerzbank if the bank hasn't raised necessary capital by next summer, according to the report. Germany already took around a 25% stake in Commerzbank to keep it afloat during the financial crisis following its acquisition of Dresdner Bank. According to the report, it is assumed that the majority of new shares would fall to the government in the event of a capital increase for Commerzbank. Germany has ruled out taking over Commerzbank's Eurohypo public finance unit, which it is required to sell to fulfill a European Union restructuring mandate tied to its use of state aid, according to the report." And so the world's most undercapitalized banks as so often demonstrated by Zero Hedge continue dropping like domino. Below we recreate the most recent list of Tier 1 casualties (seen most recently when exposing Credit Agricole as one of Europe's most dire casualties of a USD funding shortage), or banks that have the lowest capitalization, and thus highest leverage ratios in the world. If we were betting people, we would say that Deutsche Bank (and Postbank), Credit Suisses and BNP may well be next...

Earlier this morning the anti-gold brigade was foaming in the mouth on the news that the German central bank had for the first time in a year sold gold. As it turns out they were half right: the bank indeed sold gold: a 'whopping' 150,000 toz or about $250 million worth... But not in the open market, and not even to natural buyers of physical like Sprott and everyone else not infatuated with voodoo theories of infinite repoability of debt. They sold it to the German ministry of Finance... to mint commemorative coins. Coins which we are now confident will be promptly mopped up by the general public. Following the sale Germany will be left with a modest 109,194,000 troy ounces, enough to allow the country to gladly tell Europe to do some anatomically impossible things and to fall back to a hard asset baked currency if and when it should so desire.

In addition to broad bloodletting across the board, with Belgium and Spain getting crushed as noted earlier, the core confusion continues with Germany back in triple digits, and the UK, which has roughly 500% total debt/GDP including all debt - corporate and private, or double Germany's, still shockingly in double digits. This won't last long.

The impossible is happening: resistance to printing money is fading. Has Germany hawked its soul to save the euro?

Among the traditionally meandering permabullish ramblings of a man who continues to ignore the disconnect between reality and his view of the world, tonight's note by GSAM loss leader Jim O'Neill "Surreal Times" has a very ominous rhetorical question inbetween all the bullish propaganda: "The ECB doesn’t seem to regard 10-year Italian bonds as a bargain and, of course, it is rather tricky as they need to be sure that Monti will deliver. In turn, this means that what is really important is that Mario gets support from those in the background and, ultimately, the Italian voters. And then there is Spain. And still, of course, the troubling Greek situation. And ultimately, the complex world of Berlin and Frankfurt. As many European newspapers are asking in recent days, does Germany actually really still want the EMU? And, as I shall now provocatively ask, does the Euro Area? All very surreal." No Jim, all very logical, because for the first time in decades, Europe is finally starting to do the math and realizes it is failing miserably. It is those stuck in a world in which combined total exports are greater than total imports by over $300 blilion: a mathematical lunacy, who think that what is happening is "very surreal." To everyone else, the right phrase is "very much expected."

Another noteworthy Kyle Bass moment as he discusses debt sustainability among major global sovereign nations. Simply and proficiently, the hedge fund manager describes how a dwindling current account surplus in Japan, US welfare economics, and the peripheral-to-core European stressors are all Madoff-like and unsustainable. Switching from broad-brush terms to the idiosyncratic complexities of each region, Bass offers his inimitable take - in a mere six minutes - on how the status quo is quivering under its own self-deception. His rightful conclusions remain extremely worrisome and should be required reading/watching for every central banker and politician trying to keep the dream alive.

There are now only two REAL outcomes: 1)   The ECB prints (and Germany walks) resulting in the Euro losing at the minimum 30-40% of its value, or...2)   Massive defaults and debt restructuring accompanied by systemic failure in Europe.

Not only is Germany at the epicentre of the Italian-Spanish-French save-us 'discussion', they have now managed to add Ireland to their 'Uber Alles'. Reuters is reporting the leak of confidential Irish budget information by German lawmakers and Irish parliamentarians are seething - viewing the leak as 'incredible' and 'unprecedented'. Given the new laws, Germany now has the right to be fully informed about bailout countries' progress before new tranches of funds are paid out. As the Irish Daily Mirror put it perfectly "Germany is ourt new master." It is evidently clear that sovereignty is indeed blurring at the edges - cue Nigel Farage.

It's official - Germany has become just like China (or, rather, has always been like it): the more it is pushed to do something (let ECB print), the more it will do the opposite. Half a year ago we discussed that the weakest point of the European bailout language was its reliance on Collective Action Clauses which imply that any resolution which does not have 100% backing of all bondholders would potentially push a country into default. In essence, this took control out of the hands of the Eurozone head, Germany, and put it to the bondholders. Well, according to a preliminary draft released by the Telegraph and FT, as part of the new bailout 'indenture' contained in the ESM, "under a section headed “The establishment of a procedure for an orderly default as part of the ESM”, Berlin makes clear that countries which are deemed to be insolvent – rather than just suffering a temporary loss of access to the financial markets – would be allowed, in effect, to declare bankruptcy and default on their bonds: If [a debt sustainability review] is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared. In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europe-wide rules on bank restructuring." And as we discussed previously, the voluntary language will likely be taken out from the final draft, effectively giving Germany the unilateral ability to kick countries out. Which explains why the market is about to plunge: according to just released information from DPA, "the German Foreign Ministry on Friday confirmed that Germany was considering the possibility of more eurozone "orderly defaults" beyond that of Greece, as suggested by a paper leaked by the British press." In essence, what this means is that instead of relenting on the ECB issue, which as every investment bank has said would be the end of the world unless massive printing is permitted, Germany would rather kick countries out of the Eurozone instead of entering a hyperinflationary collapse. Perhaps it is now time for the banks to start toning down their language on the imminent destruction that would ensue if the ECB does not print, as this is apparently not happening...

Bob Janjuah channels the Stones when he writes in: "Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of  growth in the eurozone. It will just result in a major destruction of the ECB?s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetisation. But, as in the immortal words of Messrs Jagger and Richards, "you can?t always get want you want?. And, this being Bob, the bottom line is pretty clear: "as far as I am concerned, nothing has changed my very bearish secular view on global risk for 2012, which targets the S&P 500 in the 800/900 area, with risk of an undershoot to the 700s."