Germany

This year's biggest winner from the botched DSK affair has been France's Christine Lagarde, who despite the dropping of all charges against the former head, is now in charge of the IMF. We admit that the ascension of Lagarde to the throne of the world's most irrelevant global bailout organization (what the IMF "does" is of not importance: the only thing that matters is who Beijing, and Chinabot, feels like rescuing today) happened even though we previously predicted that Germany would be very much against it. Well, Germany let it slide, and endorsed Lagarde. That may soon change though, after the former finance minister essentially threw the entire European (read French, Swiss and German whose assets as a % of host GDP are ridiculous... yes, a technical term) financial system under the bus at Jackson Hole, a day after Bernanke said to wait until September 20 for QE3 clarity. Per Bloomberg: "Bolstering banks’ balance sheets “is key to cutting the chains of contagion,” Lagarde said today in the text of remarks at the Federal Reserve’s annual forum in Jackson Hole, Wyoming. Without an “urgent” recapitalization, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis." Lagarde, a former French finance minister who took the helm at the Washington-based IMF in July, said recapitalization should be “substantial.” Banks should look for funds in the markets first and seek public funds if necessary. One way to provide capital could be through the European bailout fund, she said." And now, one can see why Germany is fuming: not only will Germany soon have no choice but to fund the EFSF's sovereign bailout ration all on its own, which as we, and other have speculated, could be as large as €3.5 trillion (or about $5 trillion), but it will be Germany's duty to also fund the rescue of all banks on a parallel track. What is the additional tally? Why at least $230 billion in Europe alone in the next several months. Then again, when you get to $5 trillion, what's a few hundred billions between friends?

With the German economy slowing, the underlying tensions between the ECB and Germany are intensifying. And with Germany’s next round of elections due in late September, the chances of Germany moving to backstop any additional bailouts are diminishing by the day.

Germany is likely to push for European gold reserves to be used as collateral. The Deputy Chairwoman of the Christian Democrats is an astute woman and politician and knew exactly what she was saying. Indeed, she echoed other senior lawmakers who in May called for Portugal to consider selling their gold. Two leading governing party members - Norbert Barthle, Germany’s governing coalition budget speaker and his counterpart Carsten Schneider from the Social Democrats, the biggest opposition party, urged Portugal to consider selling some of its gold reserves to ease its debt problems. They called for a review of Portugal’s request for financial aid to include gold and other potential asset sales. The German people and lawmakers realize that the euro is being debased and lawmakers realize that gold may offer protection from the debasement of the euro but also from sovereign default and systemic contagion. Some of the PIIGS (to use the unfortunate and unfair acronym) have very sizeable gold reserves – especially Italy which alone has some 2,452 tonnes of gold. Portugal has 421.6 tonnes, Spain 281.6 tonnes, Greece 111.7 tonnes and Ireland has just 6 tonnes. The ‘German PIIGS gold collateral’ story is a very important one that is unlikely to go away. Indeed, it may be the story that helps educate those not familiar with economic and monetary history and with monetary economics and who do not understand gold and why gold remains valuable and remains a safe haven asset and currency today.

Yesterday we had the Bundesbank making a very strong case for why a pan-European bailout (funded by Germany), would need a "fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty" (beneficial for Germany), today we see the next and final stage of the proposed annexation of Europe by Germany - that which focuses on procuring that which is really important. Hint: not spam. From Spiegel: "Minister Ursula von der Leyen pushes the hard line: any financial aid for euro countries should only come against collateral - as gold reserves or industrial holdings."  More google-translated conditionality: "The CDU politician wants to ensure future aid allocations from the rescue fund through extensive security of the country. The ARD Berlin Studios said the minister, who is also vice-chairman of the CDU party, many of these countries had large reserves of gold and industrial holdings, which they could use for such collateral." And now we know the next steps: i) Eurobonds will come after there is a change to the European constitution which make Germany supreme ruler, and ii) at that point Germany will have all the gold in Europe pledging its bailout. Yes, gold.... not spam.

We were wondering how long it would be before Germany, following in the footsteps of such luminaries as Hank Paulson and Tim Geithner, would formally announce to the world that with it now openly calling the shots in Europe, it would be its way or the mutual assured destruction way. We just got our answer courtesy of the just released August Outlook from the Bundesbank, in which the German national bank lays out the framework of the upcoming European anschluss play by play, as Germany prepares to roll out the Fourth Reich welcome mat without ever spilling a drop of blood. After all: why injure the soon to be millions of debt slaves? To wit from the report: "Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened." Translation: "we will gladly help everyone out... in exchange for a little of that vastly overrated fiscal sovereignty... Did we say a little? We meant all of it..."

Note to the future participants of Bretton Woods III – fiat currencies can only be floated with extremely tight and transparent banking laws, nothing like what we have today and this includes central banks. And if you decide to go down the gold standard path, same thing applies, transparency and low leverage are keys to long-term stability. Banks should operate like utilities with tremendous amounts of transparency, low levels of leverage and huge limitations on market size; read: granularity. How we are stumbling around today with the same banks that almost crashed in 2008 with even greater market shares and low-visibility accounting is beyond my understanding. Read the quote above to understand why the status quo is so eager to defeat anything that would reign in these black holes. It was as true then as it is today.

Following the recent riots in the UK, it seemed there was only one safe bastion from the marauding bands of indignants, labor unions, and  general hooligans: Germany. That is, alas, no more. During the past two days, German protests against globalization, read Germany's undertaking to trade export strength for a joint European currency and a bailed out Club Ded periphery, have begun manifesting themselves albeit with a twist. As Bloomberg reports, in the past two days, arsonists have set fire to 26 cars in Berlin, mainly Mercedes, BMW, and Audis, which brings the total number of torched cars to 138, more than double all of 2010. "The arsonists want to hit what they say are ‘Fat Cats,’” Berlin police spokesman Michael Gassen said. A special unit is investigating the fires as political crimes after the police received letters claiming responsibility that derided globalization, gentrification and rising rents, he said." It appears that while the Arab Spring was started by the self-immolation of a fruit seller protesting more or less the same things, that level of self-sacrifice is strangely missing in Europe's (and maybe the world's) most prosperous, and entitled, nation. As such we doubt much if anything will come out of this, suffice to way that Joe LaVorgna will promptly raise his German GDP due to replacement costs associated with rebuilding the burnt down "fat cat" cars. Also, if this is the apex of protesting, we doubt that Italy and the rest of the insolvent PIIGS has much to worry about Germany pulling away the subsidized methadone IV drip.

Last night it was the world growth dynamo (China), now it's Europe's growth dynamo (Germany): DAX (and STOXX) both enter bear market territory (20% correction) following the Shanghai Composite. The entire world is on its way to the 25% correction we said is inevitable before QE3 is started.

Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.

• German Govt: Italy Too Big For EFSF To Save - Spiegel
• German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
• German Govt: Italy Must Make Savings, Reforms To Exit Crisis - Spiegel
• Italy Debt Guarantee Could Raise Doubts Over Germany's Finances - Spiegel
• German Govt: EFSF Should Only Help Small, Mid-Size Countries - Spiegel

The easy way out of turning to bigger, more solvent governments for bailouts has run its course.

Well over a month after predicting the second Greek "bailout" plan was just hot air, we are not only back to square minus one but heading backward. And while the market's attention is now focused on Italy, and soon Spain and Belgium, the weakest link still is Greece, whose bankruptcy, despite all the posturing may be coming sooner than most expect. It appears that Germany is once again in the renegade drivers' seat and has reverted to its core plan of taking its chances with a Greek default, breaking away from the ECB's position, and ultimately saying let the chips fall where they may. To wit, from Market News: "Lars Feld, a member of the German government's Council of Independent Economic Advisers, on Thursday criticized the European Central Bank for blocking a restructuring of Greek debt."

The much ridiculed "MLEC-type" bailout proposal of Greece, which contemplates the rolling of existing debt into a guaranteed SPV, and which was the European rescue deux ex machina for exactly two weeks, appears to have been pulled off the table, following the announcement by German Deputy Finance Minister Joerg Asmussen to Reuters Insider TV that "Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens." More: "The model put forward by some French banks is still a good base for discussions and we are currently working on this. But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table." he said, adding discussions would take place over the summer break. Translation: back to square minus one. And actually it is much worse, because if Asmussen is aware of rating agency policy, a debt exchange would most certainly qualify for an event of default. Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

Up until this point, Spiegel has been relatively objective in its coverage of the Eurozone implosion (unlike Handelsblatt, which we still await to apologize for losing all of its readers millions if not billions for urging them to invest in Greek bonds because it is their patriotic duty). That is until today. In an opinion piece, Henrik Muller writes that "if the Euro fails, Germany will be responsible" lamenting that it "may seem absurd that Berlin is perceived abroad as 'euro Nazis' rather than as a benevolent leader. But should the common currency fail, Berlin will be to blame."

The one catalyst which sent the EURUSD (and thus its first derivative, the SPX) surging on Friday was the Guardian story that Germany, Sarkozy and most importantly, the ECB, have reached a consensus over the form of the second Greek bailout. In the immediate aftermath, Greece, sensing European weakness, announced that it would seek to pass the Troica plan however with substantial changes, a development which prompted us to say that "now that Merkel has effectively thrown in the towel to her, and the
CDU's, political reign by agreeing with the ECB's and France's demands,
a move which will be brutalized by Der Spiegel in T minus 5 minutes,
the fact that Europe blinked to Greece's bluff, just may mean that every
demand out of Greece will be met." Well, sure enough here is Der Spiegel, however instead of seen as bending over to Greece, Germany appears to have had a dramatic change of heart, and told not only Greece to take its demands and shove them, but the ECB to go fornicate itself.

It appears that even a Stuxnet-crippled Iran can strike back. As the WSJ reports, "Germany summoned the Iranian ambassador in Berlin Tuesday after Iran temporarily blocked a plane carrying German Chancellor Angela Merkel from entering its airspace" in what has the making of a major diplomatic scandal. Merkel, along with a large German delegation was en route to India for an official visit, and had expected to get an uncontested green light to fly in Tehran-controlled skies, when the permission was granted... for over two hours. NDTV has more: "In an incident that could have serious diplomatic consequences, Iran temporarily refused to allow German Chancellor Angela Merkel's plane to enter its airspace on Tuesday. The plane reportedly had to circle over Turkey for two hours before being given permission to enter. The government aircraft was denied overflight rights in the early hours of Tuesday. The exact reason for the denial of overflight rights is unclear. But before the plane left Berlin on Monday evening, it was reportedly given permission by Iranian authorities. Germany along with the US and its other allies in NATO has long been at loggerheads with Iran essentially over its nuclear arms policy and alleged support to terror." Who could have possibly conceived that a country ostracized by the global community can possibly strike back. All we can say is that Air Force One better fly the friendly skies when it travels over the Middle East going forward or else it may be forced to discover just how efficient its flare and chaff Electronic Counter Measures truly are...