Germany

All eyes were on Germany this morning, where up to €5 billion in new 10 Year Bunds would hit the market, with many dreading a repeat of November's failed auction. As it turns out, the auction was a success in relative terms, with the government getting bids of €5.14 billion or more than the desired maximum - something it could not do two months ago. At the end of the day, Germany sold €4.06 billion and the resulting bid/cover ratio of 1.3 was well higher than the failed auction of November which came at  1.1, when a large amount of paper was retained and bids were not enough to cover the amount of paper on offer. Wednesday's auction is still below the average of 1.54 seen at 10-year sales in 2011 and a 19 percent retention rate is also above the 2011 average. In other words, as we suggested, the November failure has nothing to do with the Buba pushing the ECB into auction and everything to do with prevailing rates: the average yield dropped to 1.93 percent from 1.98 percent but the dwindling returns on offer due to the sharp rally in safe-haven assets as the euro zone debt crisis has intensified have led to lower than average demand at recent German auctions. And while the auction was better than expected it was still quite weak, which explains why the EURUSD is trading at overnight lows, back at around 1.2980. Not helping things is Hungary, which had a failed bond auction last week, and whose IMF rescue package is now in tatters. As a result the CDS on the country just hit an all time record 688 bps and moving much wider, while the forint dropped to record lows. As everyone knows if Hungary falls, which is now operating in a bailoutless vacuum, Austria will tumble promptly next. Next, leading to a blow out in Spanish-Bund spreads is a report in Spanish Expansion which said that Spain may request EU, IMF loans to help banks. In other words - this morning's news shows a potential risk reflaring in the European core, periphery and deep periphery which was immune until now. And finally, a UniCredit €7.5 billion new stock issue pricing at a whopping 43% discount to market price shows that fair value of actual demand for European banks is about half of where the artificially propped up price is (recall Europe still has a short selling ban)

Today, at one point in the afternoon, CNBC's Michelle Caruso Cabrera "broke" the new that according to the IIF and its always amusing chairman Charles Dallara, Greece is about a month away from a final, conclusive and this time definitive resolution with its creditors. He punctuated the news by saying "progress has been made." Naturally, a minor detail was overlooked, namely whether the haircut would be 50% as per the Second Bailout, First Amendment, or 75% as Germany is rumored to have demanded recently. Also ignored is any update on whether hedge fund Vega is proceeding to sue Greece or anyone else for cramming the fund down in what ISDA defined as a "consensual bankruptcy." But the main reason why we ignored this news completely, is that as the annotated chart below of Greek bond prices show, this is not the first time Dallara has had encouraging "news" to say about the bankruptcy process. In fact, if bondholders had merely sold the first time the Frenchman had opened his mouth, they would have saved about 70% of their money. Frankly at this point it no longer matter. The only catalyst now is March, by when Europe needs to finalize and fund the Greek bailout's €130 billion or else it is game over for the Eurozone.

The issue of Germany and its approach to ameliorating the overleveraged balance sheets of its southern neighbors will dictate the direction of sovereign spreads in 2012. The direction of sovereign spreads will also determine the direction of risk premium spreads in the leveraged finance markets— both bonds and loans. Defaults in the leveraged finance market will and should be an afterthought to the systemic risk factors inherent in sovereign and next-of-kin bank credit spreads. Therefore, forecasting default rates should take a backseat to a better understanding of German Kultur and thought that will shape the euro-zone sovereign finance structure in 2012 and beyond. The most recent European Union summit highlighted that we are left with some of the same issues that confronted the great empires prior to World War I—the battle between “English liberalism with its emphasis on individual freedom and self-determination and Prussian socialism with its emphasis on order and authority.”

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While nothing out of Italy or France was on the bond docket today, other countries in Europe will be issuing bonds on a virtually daily basis as the continent prepares to roll an record amount of debt in Q1, and in January as well (full calendar here). As such we saw new Bill issuance from Belgium and from Netherlands. The waffle country sold €1.280 billion in 3 Month T-Bills at a 2.13 Bid To Cover, a plunge compared to the 8.59 previously, albeit with the yield dropping from 0.78% to 0.264% as it falls flatly within the risk-free period defined by the 3 Year LTRO. Belgium also issued €1.155 6 Month T-Bills at a 2.01 Bid To Cover compared to 2.76 previously and a rate plunging from 2.438% to 0.364%. Elsewhere the Netherland also took advantage of the now mixed LTRO euphoria to sell €4.65 billion in Bills, specifically €2.99 billion in March 2012 Bills pricing at 0.00% (compared to negative -0.007% before), and €1.66 billion December 2012 Bills at a yield of 0.05% - obviously the market is still enamored with Netherlands as a safe haven on par with Germany. And speaking of the LTRO, that carry trade concept is now dead with the year end cash parking theory scrapped following the announcement thet banks parked the second highest amount in history at the ECB, or €446 billion, just shy of the €452 billion hit on December 27.

Following today's release of European manufacturing PMI data we are sadly no closer to getting any resolution on which way the great US-European divergence will compress. Because all we learned is that, very much as expected, Europe managed to contract for a fifth month in a row, with the average PMI in Q4 2011 the weakest since Q2 2009, essentially guaranteeing a sharp recession once the manufacturing slow down spills over to GDP. The only silver lining was that the contraction across the continent was modesty better than expected, however if this merely means that the band aid is being pull off slowly and painfully instead of tearing it off is up for question.

Following today's end of day rumor being a dud (and non-existent due to the habituation nature of the market), the closing news is more unpleasant than Europe would have liked to set the overnight mood, and comes to us via the FT (yes, that FT), which states that, as long speculated both here and elsewhere, "the German government has begun preparations for a possible state bail-out of Commerzbank." The plan would be activated if CBK is unable to figure out a way to fill a €5.3 billion shortfall in the next 30 days, which in reality will likely turn out to be far greater when all of the bank's dirty laundry is exposed for all too see. And with German banks by far the most sensitive to any perceived "tipping points", since it is the German state whose job it is to bail out the world's biggest economic block, it becomes obvious why letting doubts appear about the stability of German megabanks would likely not be a "good thing."

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.