Germany

The German "TARP equivalent" EFSF expansion vote has passed with a resdounding majority of 523 votes For and 85 Against. Obviously this was largely priced in judging by the rapid sell off in the EURUSd on the news. And now, back to focusing on the structural failure of the Eurozone which no vote can fix.

While overnight markets are rocking based on continued speculation coming from some completely uncorroborated and unconfirmed source that Europe has just boldly gone where even Goldman's Abacus has not dared to go before courtesy of the ECB's acceptance of a CDO squared "Enron Special" SPV, Germany has once again made it very clear that not only will there not be any expansion in the EFSF in regular terms, but certainly not in structural ones. As Goldman's Dirk Schumacher makes it very clear, any attempts at imposing on Germany a fait accompli reality that has no bearing in actual reality (especially one that excludes the only relevant decision-maker in Europe) will be met with increasing protests from the entire German ruling class. According to Die Welt, the Free Democratic Party is threatening to vote against overhaul of EFSF if discussions about leveraging fund don’t stop. Goldman elaborates: "FDP and CSU not fond of further increase of EFSF. Leading figures from the FDP and the CSU, the Bavarian branch of the CDU, rejected any thoughts of a further increase of the EFSF (either directly or indirectly through leverage). FDP general secretary Lindner said that "the chancellor should make clear immediately that there is no change to the business model of the EFSF." So, yes, consider that an official denial of the Liesman rumor which as typical, has no confirmation anywhere else.

"We're not doing this for the Greeks, but for us," said Angela Merkel amidst a cacophony of doomsday scenarios. It's all about propping up German banks and exporters. For the French, however, the European debt crisis doesn't seem to exist.

While we shared our brief summary of last night's lengthy ARD 1 interview with Angela Merkel, the Chancellor's views bear repeating since we are now just 4 days away from the critical EFSF expansion ratification vote to be held this Thursday in Germany. While expectations are for a prompt passage the downside, as improbable as it appears, bears some attention. Here is Goldman's Dirk Schumacher with a summary of what to expect this week out of Germany.

Back on July 21, the same day as the Greek bailout redux hit the tape, we speculated that the biggest weakness in the Second Greek Bailout is that the EFSF would have to be expanded to well over the current E440 billion (which even at its current size has not been fully ratified in Europe, and based on recent events may not be implemented until 2012 thanks to Slovenia and Finland), or about E1.5 trillion (and possibly as much as E3.5 trillion). The reason this is a "problem" is that it would have to come exclusively at the expense of Germany which would have to pledge anywhere between 50% and 133% of its GDP (as France would have long since been downgraded and hence unable to participate in the EFSF at a AAA rating). We also assumed that the debt rollover with a 21% haircut would not be an issue as it should have been a formality: on this we were fataly wrong - the debt rollover plan has imploded and means that the entire Greek bailout has collapsed as some had expected. And now that it is clear that contagion is threatening to sweep through the core, it is back to Germany to prevent the gangrene, no longer contagion, from advancing beyond the PIIGS. However, in order to prevent a full out revolution, Germany's economic elite has said it would agree to an EFSF expansion and hence installation of European firewall, but at a price: a "controlled" default by Greece and 50% haircuts for private bondholders (as German banks have long since offloaded their Greek bonds).

Just hitting Dow Jones, another set of cold hard factual bricks for the bailout rumor brigade. From Germany's FinMin Wolfgang Schaeuble:

• GERMAN FINANCE MINISTER: MAY NEED TO REVISE 2ND GREEK BAILOUT - Dow Jones
• GERMAN FINANCE MINISTER: DOES NOT MAKE SENSE TO SPECULATE ABOUT NECESSITY FOR ADDITIONAL DECISIONS ON GREECE: RTRS
• GERMAN FINANCE MINISTER: THE RECAPITALIZATION OF EUROPEAN BANKS IS NOT A MATTER FOR THE ECB BUT FOR MEMBER STATES
  

It appears the euro is now soaring on expectations of a rumor to refute this latest fact.

While the trope of US "short-termism" has been significantly discussed in recent months, in an attempt to explain why the capital markets no longer align with the 7-11 year duration of the business cycle, but with the duration of the elected term of the US president or of various congressional and senatorial critters, and in many cases, with the lock up period at various prominent hedge funds (nowadays as short as 1 month), little has been said about the comparison between the "political imperatives" that define Europe's economic growth dynamo: Germany. And as last week demonstrated, when it comes to the US attempting to impose its "imperatives" on Europe (read Germany) in the form of the one and only "solution" available to the US (namely print, print, print) any such venture ends in mockery, ridicule and general disparagement of TurboTax experts. So just what is it about Europe that makes the two regimes so incompatible? Well, for one thing the fact that unlike the US, Germany has already suffered through a period of hyperinflation, seen the disastrous impact of central planning in the form of a totalitarian regime and it subsequent dissolution with the fall of the Berlin Wall, and experienced an economic "miracle" or the period between 1948 and 1955, in which Germany denied central planning and unleashed a golden age predicated by free and fair capital markets, and the abolition of all rules and regulations established by the occupying powers. But that is not all: aside from the purely empirical perspective that Americans so acutely lack, Germany also has a vastly different political system which explains why the prerogatives behind the German ruling party are so vastly different than those for the US, and why Europe will almost certainly never embark upon a path comparable to that of the US. The Privateer's Bill Buckler does the perfect comparison of the "political imperatives" that shape, define and most importantly, distinguish the US from Germany, and which we believe should receive far greater attention in the mainstream media than they currently do.

Looks like no more official trips for G-Pap anywhere very soon:

• ECB'S WEIDMANN-IT IS WRONG TO ABANDON ALL PRINCIPLES OF MONETARY POLICY BY CITING A GENERAL EMERGENCY-SPIEGEL
• GERMAN CSU HEAD - IF GREECE CAN'T OR WON'T KEEP TRACK WITH RESCUE PLAN THAN AN EXIT FROM THE EURO ZONE IS CONCEIVABLE-SPIEGEL

Geithner gets smacked down, and Germany might be threatened by a populist movement to exit the E.U. For the first time ever, a clear majority of Germans no longer sees any benefits to being part of the Eurozone.

Update: more bad news as Reuters reports that participation in the Greek private sector debt initiative at just under 75% according to financial sources. This is a miserable miss to the required 90% and means that the debt rollover initiative is basically dead in its tracks, as 25% of the bondholders will become holdouts and seek to derail the entire Bailout #2 process in return for massive "nuisance value" payments. Problem is nobody will pay said demanded payment.

Those seeking a reason for the sudden drop on no news, can attribute the weakness in the EURUSD and its 1.000 correlated derivative, the US policy vehicle known as the stock market, to the following news making the rounds brought to us by RanSquawk, namely that Germany is likely to delay ESM legalisation beyond year end of 2011. Specifically, "facing a storm of protest from within its own ranks, Germany's ruling coalition government has delayed discussing the ESM in cabinet meaning that legislation on the Eurozones permanent rescue fund, will not likely be in place by end of this year as hoped." As a reminder, Stark quit due to disagreement over the SMP's usage. This most recent update means the SMP program, not only will not end as was expected originally in September, but will be forced to monetize Italian debt for at least three more months, and likely much longer, until the EFSF is activated, some time in Q1 2012. This also means that the ECB's SMP program, currently pregnant with €140 billion of PIIGS bonds, will expand to double its size by the end of the year, further pushing the zEURo lower as Europe continues with its explicit debt monetization on the books, and not as was envisioned before, using an SPV in the form of the EFSF.

The markets are breathing a collective sigh of relief as the major global players, with the exception of the Chinese, are now sitting at the same table determined to forge a path through this political and economic malaise. Gold is trending lower as the risk trade is reduced. It is a relief that the U.S. administration has dispatched their boy wonder, Messrs Geithner, to Europe, whether he can calm nerves and create a political consensus is the question. The European Project is at a fork in the road, do they bind themselves together politically and fiscally and socialise the burden  where rich pick up the tab for poor or do they withdraw into their domestic political worlds and turn their backs on what is arguably the greatest economic union in the history of the world. The nexus of the issue is the same as it has always been, can you have an economic union without political union. The answer would seem to be..... maybe, as long as nothing too serious happens, but the moment the economic cycle shifts down a gear, domestic populations suffering from economic contraction will go tribal and look after their own first. A thought provoking paper by the UBS economist, Paul Donovan, articulated the choices facing Europe in a paper "How to break up a monetary union" written in February 2010. His central thesis is that in its current form the Euro just does not work, especially a one size fits all interest rate policy.  Here are some excerpts from his excellent report.

The last two weeks have been full of headlines regarding the volatility and decompression of sovereign spreads around the world. What has been more intriguing to us than day-after-day of discussing Greek 2Y yields or French 5Y CDS has been the relative increases in net notional credit protection outstanding on Germany. The German credit worthiness and sovereignty stands at the heart of any solution to the crises in the Euro-zone and it appears market participants are increasingly pricing in that risk transfer. This is exactly the same transmission we saw in the US when the Fed/TSY announced day-after-day of acronym-laden support mechanisms and shouldered more and more of the private balance sheet risk. This week, both Brazil and Germany overtook Spain in terms of net notional CDS outstanding.

Speaking at a briefing Rome, Germany's economy minister Philipp Roesler has been dropping truth-bombs this morning. These have perhaps been responsible for the decompression in European credit spreads (SENFIN 9bps off tights). The most unequivocal, and most ultimatum-like is his noting that "Merkel and Sarkozy will send a 'clear signal' to Greece tonight on the need to meet deficit cutting goals".

Tim Geithner, in his third third annual pilgrimage to Europe, the first two of which concluded with one after another more discredited stress tests (because in Mark-To-Unicorn America they worked sooooo well), has a slightly different message to the locals on how to run their failed monetary union. From Reuters: "Treasury Secretary Timothy Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund and consider boosting its size, an EU source said on Tuesday. The official said Washington was worried that the euro zone was not acting fast enough to enhance the EFSF fund and that the stability of the global financial system was at stake. He is likely to tell the ministers that they should consider increasing the size of the EFSF to equip it better for the needs of potential bank recapitalization. "He will probably tell Germany to give up its resistance to an increase in the size of the EFSF," the source said. A well connected fund source told Reuters Geithner had been pushing for a solution for European banks along the lines of the TARP program in the United States, but had not made much headway." Translation: Germany has to immediately throw billions more of taxpayer money into the insolvent bank pit (just like America did), or else Tiny Tim will get angry. Well, if Germany's ruling class was against pledging over 100% of its GDP to bailout Greece and the other insolvents, it will surely be persuaded to commit political suicide after the last man standing from Obama's administration, who still inexplicably has not been fired for gross incompetence (and also prosecuted for tax evasion), has his say. And just as the short selling ban lasted all of one week before Europe's banks tumbled, even a favorable uptake of the idiot's proposals will at best lead to a 24 hour spike in prices followed by what will likely be the terminal tumble into the abyss of failed Keynesian-Bernankian experimentation.

No sooner has the EFSF "passed" the German constitutional court (with large caveats, most notably that the German government will have a much greater say in any and all future European bailouts, assuming such are actually needed and the Euro does not implode), that we learn that yet another hurdle for the Greek bailout presents itself courtesy of primary fund provider, Germany, which is now finally very angry (as suggested first here "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP" two months ago) at what it realizes is an ongoing transfer without checks and balances (remember: the insolvent PIIGS hold all the trump cards) of capital from Europe's prudent workers to those who are, well, not. To wit, according to the Spiegel, German FDP Party has just announced that it will seek a referendum on the ESM/EFSF. What this means is that while the hurdle is not insurmountable from a legal perspective, it will merely add further uncertainty to the final bailout of a country that according to the market at least is 100% bankrupt in an alternative universe in which fundamentals matters.