Germany just launched a €480 billion fund that it will use to backstop its banking system should a Crisis hit. And in the fine print, which no one has caught,... the fund will also allow German banks to dump their EU sovereign bonds... as in German banks' PIIGS/ EU exposure disappearing in an instant. So... why would Germany do this?
For all this talk and hype, QE 3 is nowhere to be found. And it won’t be showing up anytime soon unless a full-scale Crisis hits. The reason for this is that the political landscape in the US has changed dramatically with the Fed becoming more and more politically toxic. As a result of this, the Fed (with few exceptions) has begun to shift into damage control mode.
The Fed can get more market gains from Charles Evans than $600 billion in QE. Hey Bernanke, here’s an idea: just stop bothering with monetary policy at all give Charles Evans his own TV show. Heck, we'd get the same effect with less Dollar devaluation.
This entire deal is just stupid. And all it’s done is alert Spain and Italy to the fact that handing over fiscal sovereignty and implementing austerity measures in exchange for bailouts is a waste of time. Indeed, Spain just woke up and smelled the coffee. And it's told the EU to "shove it."
Remember, just last week Bernanke told Congress that no more QE was coming. Also remember that the Fed has been largely using verbal and symbolic interventions to prop up the market rather than actual money printing or new monetary policies (Operation Twist 2 only shuffles the Fed balance sheet; it doesn't actually inject more money into the system).
German leaders, particularly Merkel and Schäuble see the writing on the political wall: that both Greece and France are likely going to find themselves with new leadership that is pro-socialism, anti-austerity measures, and most certainly anti-taking orders from Germany. Thus, Germany must be aware (as the EU, IMF, and ECB are to some degree) that it is ultimately fighting a losing battle by participating in the bailouts. Indeed, Schäuble even went so far as to recently call Greece a “bottomless pit” where money is wasted (having just participated in Greek bailouts that exceed the entirety of Greece’s GDP, I have to admit he does have a point here). So while a “deal” may have officially been struck for Greece, there are deep underlying tensions that could bring proceedings to a crashing halt at any point.
The Chinese population is beginning to realize that the Government is losing control. People are willing to go along with a regime as long as they can “get by” under it. But as soon as it becomes impossible to survive… then situations like Wukan happen. There will be a LOT of Wukans in the coming months and years in China. Whether it’s by inflation or an economic contraction brought about by Europe’s collapse (Europe is China’s largest trading partner), civil unrest and “mass incidents” will be on the rise in the People’s Republic as the Chinese realize that the current system and the supposed wealth it will create for them are in fact a giant fraud.
We’re fast approaching the end of the line here. It’s clear that the EU is out of ideas and is fast approaching the dreaded messy default they’ve been putting off for two years now. Indeed, Greece is just the trial run for what’s coming towards Italy and Spain in short order. NO ONE can bail out those countries. And they must already be asking themselves if it’s worth even bothering with the whole economically crushing austerity measures/ begging for bailouts option. Which means… sooner or later, Europe is going to have to “take the hit.”
Having spent this money, your next concern becomes avoiding popular outrage as sooner or later folks will find out that this money was practically given away and that everyone else got a raw deal. Let’s say that you just spent a large sum, to the tune of several trillion Dollars, bailing out various businesses that were literally run into insolvency by shortsighted and greedy business practices.
Europe is broke. Completely and totally broke. The whole notion of bailouts and debt swaps is pointless here, you’re talking about systemic failure due to the entire financial system being overleveraged and based on spending patterns that are unsustainable in any way.
Why is the financial world so messed up? Because it’s run by Central Bankers. And those folks view money very differently than the businesspeople who create businesses, jobs, and wealth.
Germany is in a great squeeze. On one side the ECB and G20 want Germany to step up with more money to save Europe. On the other hand, German CEOs, voters, and even the courts, are increasingly wanting out of the Euro. This is not a situation that gives one much confidence that Germany will stick around for too much longer. It is my view Germany is going to do all it can to force Greece out of the Euro before March 20th (the date that the next round of Greek debt is due) or will simply pull out of the Euro (but not the EU) itself.
Will Germany go “all in” on the Euro experiment? I doubt it. In fact I’ve found the “smoking gun” the little known act that Germany has recently implemented that proves the country has a Plan B that involves leaving the Euro with minimal damage.
Consider that when we include the rest of the PIIGS countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.
The financial world is awash with theories as to how significant the Second Greek Bailout is. I’m far less concerned with this (the Bailout accomplishes nothing of import and only puts off the coming Greek default by a short period). Instead, I think it much more important to ascertain the true exposure to Greek sovereign debt. And what better place to start than the banking system of the one country that is playing hardball with Greece during this latest round of negotiations: Germany.
