Germany

Like clockwork, hours before the US market reopens, we get another Greece bailout. Since last week's Chinese white knight "rescue" of Portugal helped the EUR for about 18 hours, it is now time to get the biggest guns possible out: the WSJ reports that Germany, contrary to populist demand which has indicated that another German bailout of Greece would mean the end of Angela Merkel, has decided to allow Greek bailout round two to proceed. Per the WSJ: "Germany is considering dropping its push for an early rescheduling of
Greek bonds in order to facilitate a new package of aid loans for
Greece, according to people familiar with the matter.Berlin's concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece's funding needs before the indebted country runs out of cash in mid-July." The end result: the EURUSD surged by 70 pips from the closing print of 1.4270 to a high of 1.4350, although the half life of even that innuendo appears to have peaked and the pair is now on the way down, as it does absolutely nothing, except to destroy any credibility Merkel may have had, to resolve the impasse which is that, well, Greece is bankrupt.

Certainly no one should expect Europe’s banks to suffer their own losses after making idiotic loans to corrupt governments. It’s much easier to stick the people with the bill by establishing a trillion dollar bailout fund with taxpayer money. Problem is, people in Europe are starting to wake up and get it. The anti-euro “True Finn” party in Finland recently surged in the polls to become the country’s third-largest political party and a major obstacle for any European bailout. This weekend, Spain’s ruling Socialist party was hammered with losses as voters voiced their utter disgust with the current government’s handling of the economy. In Germany, this year’s state election results are showing that voters are sick and tired of shouldering the financial burden for the rest of Europe. Chancellor Angela Merkel’s ruling party is losing miserably, though in a pathetically desperate move, some local governments are changing suffrage limits and allowing 16-year olds to vote. This is the strongest indicator yet of how bad the situation in Europe has become: German banks are so over-exposed to the PIIGS sovereign debt that, in the face of political revolt all across Europe, German politicians have resorted to recruiting the Justin Bieber crowd to maintain the status quo.

To all Americans complaining about high taxes, better keep your beef on this side of the Atlantic. According to a recent OECD report, captured by the Economist, when it comes to total taxes paid out by both employees and employers, the US doesn't even come close to its just slightly more socialist European cousins. In fact, while total taxation as a % labor costs is about 30% in the US, comparable with Japan and Ireland, in France and Germany this number is nearly half of the total. Which explains why there is no greater threat to these two countries than the perpetuation of the status quo welfare state. Should Greece file Chapter, who knows what will happen to the Bismarckian ideal. Incidentally, on the other end: Chile, which pays out just 7% of labor costs to taxes. Per the article: "The report splits out the tax burden on employment which is paid by employers (in the form of social-security payments) and employees (as income tax and more social security). France and Germany have some of the most costly tax regimes—with people who earn the average wage taking home just over 50% of their total labour cost. The effect of fiscal austerity, particularly across Europe, has meant that the tax burden rose in 22 out of the 34 countries in the OECD from 2009 to 2010. Meanwhile real incomes for average-wages earners fell in 15 OECD countries. As the second chart shows, these reduced earnings caused by the world recession and subsequent inflation tend to have a much larger impact on incomes."

Today's EUR trading session which begins in about 4 hours, may be rather violent. While on one hand we have bond-negative news out of Spain, the biggest news once again comes out of the Swiss journal NZZ, which citing greek newspaper Kahtimerini, discloses that insolvent Greece has less than two months of cash left, or enough to last it until July 18, unless a new installment in the bailout tranche is approved for the country by the now headless IMF, and the "suddenly" insolvent ECB. Insolvent, because as Spiegel will report in its headline article tomorrow, and as we have noted many times before, the bank is suddenly finding itself lending out money collateralized by now virtually D-rated bonds: something not even Trichet will be able to spin off to the increasingly malevolent media. Per Dow Jones: "Skeleton risks amounting to several hundreds of billions of euros are on the balance sheet of the European Central Bank, magazine Der Spiegel writes in a preview of its edition to be published Monday. Those risks arise because banks, above all from Greece, Ireland, Portugal and Spain, have provided as collateral asset-backed securities that are unfit for central bank loans as their debt rating is low or non-existent, the magazine says." Alas, the European central bank's dirty laundry is being exposed just as a rift between the bank and Germany: its most solvent backer, is starting to develop. Also from Dow Jones: "German Finance Minister Wolfgang Schaeuble cautioned in an interview published Sunday that there shouldn't be a conflict with the European Central Bank over a possible restructuring of Greek debt. "If in the end it should come to an extension of bonds, of course, we need the approval of the IMF and above all of the ECB. Under no circumstances should it come to a conflict with the ECB," Schaeuble told Bild am Sonntag. "I advise all of us to use restraint in public debates about this question." Several ECB officials have rejected a restructuring of Greek debt and have warned of possible catastrophic consequences, while European finance ministers are slowly warming up to the possibility of some kind of restructuring as a last resort." Thus the crunch time for Europe's latest kick the can down the road round, once again centered on a bankrupt Greece, may be coming fast, and this time with a rather furious Germany.

In a free market, we wouldn't have unsafe nuclear reactors ...

In a very unstunning development which would expose all those Greek and EU proclamations about a solvent Greece for another relentless barrage of lies, it appears that Germany is now resolved to not only restructuring Greece (and with certain Greek bonds trading around 60 the market has effectively thrown in the towel), but has provided a timeframe in which this should occur: "German government sources said on Monday Greece will likely restructure its sovereign debt before the end of summer, putting a time frame to recent speculation that sent the euro to its lowest in two weeks. "Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring," one high-ranking coalition source told Reuters. "That does not mean that the federal government is striving for (a restructuring) but such a step will probably not be avoidable," he added, echoing views from other coalition sources." Supposedly the thinking in Europe is that banks should have built up a sufficiently large capital buffer to where the permanent impairment of Greek senior debt will not lead to another bank run. The question however is how well has Europe considered any other unpredictable consequences, which by definition, are "unpredictable." Recall that the financial system nearly ended after the Lehman bankruptcy following the freeze in money markets: a side effect that nobody had expected at the time. What will happen this time around when Greece becomes the first "Lehman" in the sovereign realm, and just how many trillions will have to be invested to undo "unforeseen" consequences?

As we pointed out yesterday, while the US navy is seriously starting to amass in the Persian Gulf region, it has left the Mediterranean and more importantly, the Libyan coastline unguarded. With concerns that Gaddafi will follow through with what we speculated on Monday was a Saddam-like "after me the flood" act and burn his oil facilities, this may not be the most prudent thing. Luckily, here comes Germany. According to Spiegel, Germany has sent three warships to Libya which may possibly get involved in a "military engagement."

Europe is abuzz this morning following a Die Zeit article indicating that Germany was planning for a Greek debt restructuring, one that would allow Greek to retire debt earlier than expected. From Market Watch: "The German and Greek finance ministries on Wednesday denied a report in the German weekly newspaper Die Zeit that the German government was weighing a plan that would allow Greece to retire some debt early, using subsidies from the European Financial Stability Facility, Dow Jones Newswires reported. Spreads on Greek credit default swaps, or CDS, initially widened but then narrowed after the Die Zeit report was denied." And while everyone is of course immediately denying that the EFSF is nothing but one big ponzi vehicle, which it would turn out to be should this report be proven true, Goldman's Dirk Schumacher has released two notes which confirm that this is indeed precisely the plan. And just as Goldman dictates US fiscal and monetary policy, so its European strategists are critical in determining European pyramid, kick the can down the line plans.

With the US Mint selling silver at an unprecedented pace, it was only a matter of time before the silver shortage would be spotted across the Atlantic, where distributors ran out of both gold and silver on a daily basis during the first time Europe became insolvent some time in early May 2010. Sure enough, BullionVault.com has announced that it has run out of silver in Germany "due to high demand." In the meantime, the CFTC's actions have succeeded in allowing the JPM's suppression of precious metals markets to continue indefinitely, yet all its actions have really done is to provide a short-lived lower cost basis for the precious metals as there is no indication demand is subsiding. At some point the margin calls will come. Then not even Gary Gensler will be able to bail out JPM (we wish we could say the same about Ben Bernanke to whom JPM's role as head of the tri-party repo clearing market is irreplaceable in maintaining an orderly shadow liquidity market).

Wondering why Bund yields have been pushing ever higher over the past month (not to mention the two failed German auctions in recent weeks)? Mohamed El-Erian, in his latest op-ed explains: "Sensing the risk that Germany’s balance sheet (and that of the ECB) may continue to be contaminated by someone else’s problems, the markets have started to signal some initial concerns about the country’s fiscal robustness. In addition to some jitters at a recent government bond auction, German interest rates have followed American ones sharply higher even though the two countries’ fiscal paths diverge dramatically...This highlights the dilemma facing a Germany that feels politically compelled to support a liquidity approach for peripheral Europe’s solvency problem, but knows the economics of the situation are wrong and, ultimately, harmful."

Last night, in a less than surprising Op-ed in the FT, Jean-Claude Juncker and Giulio Tremonti, prime minister and treasury minister of Luxembourg and Italy’s minister of economy and finance respectively, once again floated the idea that the time has come for a joint European bond issuance mechanism, because apparently lack of individual monetary policy is not enough, European countries now have to surrender their fiscal decision making to a bunch of dogmatic bureaucrats in Brussels. The desperate duo, which knows all too well, that they could well be next on the bond vigilantes radar, write: " The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state." We ridiculed the idea last night, noting that this proposal would only happen over Germany's dead body, which already sees as contributing far too much to keeping the European experiment alive and getting only dirty looks from its voters. Today, Germany steps up and confirms: "Germany on Monday rejected the idea of increasing the size of the European Union's safety net and ruled out a proposal to issue a joint euro zone bond." And additionally recent pressure to hike the rescue fund by the IMF and internally were also promptly shut down by Germany, which as we pointed out last week threatened to pull out of the Euro if the political wrangling by pathological liars such as the Greek elite continued: "We see no reason at all at the moment for an increase in the size of the euro rescue shield -- no reason at all." Which means that with no recourse to do anything structural, the ECB is back to buying up Portuguese bonds in a fake bid to create a sense of normalcy in the bond market, which everyone with half a brain knows will collapse the second the ECB pulls out or runs out of paper.

Today's much anticipated Portuguese T-Bill auction carried some good and some not so good news. While the Bid To Cover on the €500 million 12 month paper improved from 1.8 to 2.5, the rate on the 1 year issue surpassed 5% for the first time, and came wide of analyst expectations, pricing at 5.281%, compared to 4.813% previously. Per Reuters: " That was higher than the roughly 5 percent that dealers and analysts had looked for ahead of the sale, though the rise in short-term borrowing costs was much smaller than a more than 150-basis point jump at the previous tender in November.  "There is no place to hide on the curve for Portugal anymore. Once again, the auction increases pressure to find a circuit-breaker to limit the damage, which is most likely to mean asking for aid," said David Schnautz, debt strategist at Commerzbank in London." Filipe Silva, debt manager and Banco Carregosa explains why contrary to the EUR's reaction, this is not good news: "This rate is very high and Portugal cannot keep raising its rates at this pace, 47 basis points in just two weeks." Yet despite the weak auction, Sovereign spreads tightened modestly after rumors that the ECB would announce an expansion or a new program to buy peripheral sovereign debt. Which was to be expected: the Portuguese auction was quite irrelevant compared to what happened in Germany earlier, when the country held its weakest 5 Year Bobl issuance in 6 months: in an auction of €4.13 billion in paper, the government saw a mere 1.1 Bid To Cover, the weakest since May, and forcing the government to retain 17.4%, or €0.87 billion of the auction to make it not appear that the auction was a failure.

And so the can has been kicked down the road one more time as Ireland's Brian Lenihan has just sold out his country to the IMF, the ECB and the Fed for a few extra years of puppet control. RTE reports that EU Finance Ministers are due to hold a conference call later this evening during which Ireland is expected to make a formal request for a financial rescue package. What is not discussed is how the Irish people, now likely furious at being manipulated over a lost cause will express their anger over being the latest sheep used to bail out Europe's ever more insolvent banking system. They can at least sleep soundly, that they won't be the last. After today's rescue of Ireland, the vigilantes will focus their undivided attention on Portugal and Spain - perhaps these two countries will be a little less timid when it comes to rescuing Germany's banking oligarchy.

Now I don't mean to be overly cynical or anything...

Silver's sky-shot to a new 30-year high of $27.73 per ounce has led to a new phenomenon in Germany. For the first time in history it is theoretically possible to buy two last series of silver coins with a denomination of €10 and a silver content of 0.535 ounces for less than the silver equivalent. According to a report in German Daily "Welt" the soaring silver price has forced the German government to bring forward the starting time of sales of the 2 commemorative coins into October to save face. The coins now have a value of €10.66 but have to be sold at the denominated Euro value.