Germany is the real winner in a transfer union

So Sebastian Mallaby writes in this FT article.

150 replies on “Germany is the real winner in a transfer union”

So the Paul A. Volcker senior fellow in international economics at the Council on Foreign Relations thinks that Germany:

might yet muster the will to rescue the euro – and salvage a generation of efforts to build an integrated Europe.

Perhaps he might find it enlightening to look at the results to date of article chapter 10, 107 (2) of the German Constitution, federal financial equalization.

There is a strong political movement to get rid of article 107 altogether, three counties, Bayern, Baden-Württemberg and Hessen – The pay masters of course – consider to call on the constitutional court, which of course, is nothing but a political strategy.

The 30 years lasting discussion on the meaning of 107 has been exhausted from every possible angle, bottom line, it does not work!

Of course Germany benefitted, but the peripheral countries benefitted and could have secured sustainable benefits – and not converted them into burdens – if they had been well-governed. There is a direct correlation between, on one side, the effective use of parliamentary democracy, the quality of governance and the extent of democratic legitimacy enjoyed by governments and, on the other, the economic, fiscal and financial performance of EZ members.

Our Club Med cousins have always had difficulties securing and applying parlialmentary democracy to impose effective democratic governance on native power elites. Ireland shares some of these difficulties in terms of being able to secure parlamentary democracy but of not being able to apply it. In this sense it is probably the most northerly member of Club Med. And all EZ members have struggled to deal with the Neo-con economic and financial lunacies exported from the US, both via the UK and directly.

There seems to be a sense in Germany that the current pressures being exerted will compel a demand for effective democratic governance in the Club Med and for genuine stiuctural reforms that will lead to better economic performance. Providing transfers will kill that demand.

Simultaneously, I don’t doubt Chancellor Merkel’s intent to subject financial markets to some measure of democratic governance. But I fear that her approach may be based on a poor grasp of economics, history and the nature of the markets she is confronting. It is almost that she is challenging them to their worst as she believes they will also lose. The threat of ‘mutually assured destruction’ may well have contained the Cold War, but it won’t work with markets – and certainly not with these markets. These markets are not entities with a single mind and purpose. There are participants who will profit during chaos and meltdown – and it is in their interests to encourage the generation of chaos and a meltdown. All other market participants can do is to limit, hedge, unwind or protect thier exposures.

Those who profit from ‘disaster capitalism’ will simply press their attacks if they sense political weakness. Chacellor Merkel simply has to consent to the use of the ‘big bazooka’. Merely deploying it could be sufficient; there might be no requirement to use it in anger. These ‘disaster capitalists’ tend to be cowardly bullies. Once they detect the gleam of a sharp steel blade they will melt away to re-group and attack a weaker entity.

I had the most awful dream last night the Merkel doesn’t actually know what she’s doing and Germany is just spoofing/flying by the seat of the pants. Perish the thought.

The second part of the dream was that France got downgraded this weekend and German bond yields went through 3% before Christmas. Things held together for Christmas just about but it really hit the fan in January 2012.

Happy New Year.

@ PH: For a few mohs I was thinking you were describing the polity, governance and policies of E-Island; ie., Easter rather than Emerald.

I can imagine The Big Man, clad in appropriate fronds and body paint saying, “OK, this is Big Maui-Bazooka time”. Either you guys stop squabbling about whose Maui-bazook is bigger or I will cut down all the trees and you won’t be able to build any more. So there!”.

If you have a bazooka, and you point it at your enemy, don’t threaten to shoot: just, shoot! That is, do a WillyJohn: get your retaliation in first!. Else, YOU will be disagreeably suprised.


imho excellent analysis by Volcker. Clearly on the credit side Germany has benefited greatly from the peripherals. Now that wealth spigot has been switched off, will Germany turn on its own wealth spigot for the peripherals?

Ni dóigh liom é!

There are also old Franco German rivalries at work complicating Volcker’s analysis to a great extent. This is the question mark that exists over the health of both French and German banks.

The question I have is how deeply scarred and burned are the French banks in regard to their purchase of financial OTC products related to subprime that brought Lehman’s down? The word is Wall Street offloaded a lot of their toxic assets onto European banks and these losses lie hidden without the radar of decent stress tests. German banking in theory were less prone to snaring on these financial missiles.

The bottom line and close to the heart of any resolution that will end the fudge and brinkmanship and mess is

a) cleanup of the financial industry, decommissioning the lack of regulation, and replacing this lack of regulation with more transparency and accountability eg credit default swaps and all derivative trading should be done openly on public clearing houses, practices such as naked shorting should be outlawed.

b) a tax on transactions on the financial markets

c) nb, perhaps most of all, the need immediately for deep stress testing of investment banks across the EMU particularly those in the core, in order to assess the viability of any rescue measures/bailouts.

The above might clear away the fog a bit and expose the true nature of the problems that need to be dealt with. It seems to me there is skullduggery afoot in the financial services and banking industry allowing vast profits to be made using means that should be declared illegal.

Its one question to dig out sovereigns, its quite another to pour money down the waiting mouths of the banking and financial services industry who’ll use bailouts for their own profit and refuse to lend to taxpayers.

@PR Guy,

That’s the thought I woke up with as well and which provoked my (lengthy) comment above. Chancellor Merkel seems to think she is fighting a modern version of the Cold War which shaped her as a person and as a politician. She is not.

Those who are active in the markets are the ‘disaster capitalists’ and others who are crying out “For Christ’s sake, do something as we’re getting hosed here”. But all she and the other Grand Panjandrums can dream up is to keep the ECB under tight control away from the field of battle, rule out any transfers, impose economy crushing austerity on the peripherals, propose totally counter-productive notions such as restraining ratings agencies, applying a financial transactions tax and banning shorts and moither about treaty changes and centralised economic governance.

Thomas Mayer of Deutsche Bank says Germany joined the euro at a high rate when it had a current account deficit.

Germany is now accused of overweening power but post Sept 2008, there should have been more pressure on countries with rotten systems to get their houses in order.

It took Zapatero in Spain 2 years until he accepted that reform was necessary and the biggest problem Italy, was left to fester until the vigilantes were at the gates of Rome.

The black economies as ratios of GDP have been estimated to exceed 20% in Italy, Spain and Greece.

I’m not suggesting that there should have been massive austerity but with Italy growing at 0.3% annually over a decade, it was obvious that the system was in dire need of reform.

If there had been some progress on reform, it would likely have had an impact on the northern democracies.

Whats the Italian for ‘death spiral’?


@ MH

“If there had been some progress on reform, it would likely have had an impact on the northern democracies.”

And if the northern democracies had understood that the earlier one acts, the cheaper the cleanup costs, perhaps the EZ wouldn’t be in such a mess today.

As the seandaoine used to say “cnuasaigh ag am oireamhach”
Lay up in time.

S’pose Monti will be on Bloomberg shortly telling us that Italy is fully funded up to next week. To borrow a metaphor from complexity theory – the vultures are now ‘flocking’, flying over frankfurt, and depositing tons of Götterdämmerungs from on high …

meanwhile the peasant shooting season continues unabated … is there no end to this ideological financial system driven insanity?

@ seafóid

Some voters are not as rational as you!

Recall the concerns in Ireland in 2008 on ‘democratic deficits’ in Europe and the elites ignoring their electorates?

Be careful what you wish for, as the saying goes.

In the Netherlands, an extreme right wing party holds the balance of power.

@ Michael H

“In the Netherlands, an extreme right wing party holds the balance of power”

Thankfully the PIIGs are not Muslim 😉 Money is the only language these extremist parties understand and Dutch business interests are going to be hammered if the Euro breaks up.

Is there no end to the spin masquerading as serious analysis? The article does an excellent job of demonstrating that the Germans benefitted from the peripheral bubble over the short term, just as the periphery did. It says very little coherent about whether that effect is likely to persist in a non-bubble, non-bust transfer union, under proper pricing of peripheral risk.


Core/Periphery distinction is no more.

Today is the present – and the future we do not know.



That says it all. If Georg Soros was Italy’s PM he could not borrow for less.
It the debt stupid!!.
The doors of the debt markets are closing rapidly now.

@ Paul Hunt

I would agree with your general analysis. The article by Mallaby is very one-sided, about the only point with which I would fully agree being the statement that Germany has done everything to keep its contribution to a minimum. But this is what sovereign states do. The real change is not in Germany’s overall behaviour but in her relationship with France as I have commented on another thread. This is a very worrying development and the French media are, in fact, replete with analysis of the possible consequences. Le Monde places much of the blame with France itself and the country’s outmoded views on sovereignty.

In the context of treaty change, the fundamental question for smaller member states is whether it is Germany’s intention to strengthen the Community method or to weaken it. It seems to me that there is a conflict within the German policy machine on this point. The list of proposed amendments now firmly promised by Merkozy should give an indication of the future direction of negotiations.

But this debate is really a side-show. In the real world, the evidence to date is that Merkel’s crusade in relation to the markets is a disaster and the failed auction may, and may not, have brought this home in Berlin.

I re-post here the link to the speech last evening by the member of the Executive Committee of the ECB.

It is a very thoughtful speech although many will consider that it is failing to confront reality. In one respect, in relation to PSI, it certainly is not.

“A classic example of this divergence has been the debate over private sector involvement. For a domestic audience, banks should internalise the consequences of their lending decisions and should be punished for their past behaviour. But from a financial market perspective, such communication is disastrous. It signals to investors that assets that were previously risk-free are no longer so, that the euro area is a market where their investments are not guaranteed. And as markets are forward-looking, they sell their assets today. This immediately undermines the progress I have just described”.

Finance ministers will have to return next Tuesday to the nitty-gritty of the piece-meal steps undertaken, but not yet, quite obviously, fully agreed, against a background clamour for the type of shock and awe action desired by the markets. Until Germany gives ground on the issue of PSI, there will be no improvement in market sentiment.

Yes , but only in a narrow monetory sense – Germany like all western countries runs down it Utilities both financial & Physical so that the Financial sector can extract a tempory surplus.
I see countries that must export their wealth as colonies of the global financial system to be honest.
Sure Ireland & Singapore are the most extreme examples (its no coincidence that they were both jewels in the crown ).
But Germany is also a tool , but a strangely continental not oceanic one.

The Truth is Germany is a Industrial Pygmy that must export Boutique Industrial hardware to achieve a trade surplus in the more vital goods it imports.
Its energy strategy for example is not a serious one – solar panels at 50 degree latitude illustrates it is not a serious country with any degree of Independence but must now play Russian Gas interests off more oceanic western affairs.
I don’t think German workers outside the financial sector have done very well given their productivity — the sheep farmers have done well though although its not a sustainable agricultural practise going forward as they say.


Mostly agree, but some ‘shock and awe’ is required to provide the time and space to get the political ducks in line. The ‘disaster capitalists’ need to be sent packing and then some sense might emerge on managing and resolving excessive debt burdens. Yes, the markets under-priced risk and generated hugely leveraged financing (while making out like bandits), but governments encouraged them to do so, faciliated it and, in the short to medium term, they and their voters believed it was beneficial.

It takes two to tango (Mr. Bond has been eloquent on this – and Ms. Lagarde has also made the point). Restructuring banks, as recommended in a tepid form by the UK’s Independent Banking Commission, into wholesale/investment and retail/consumer-focused businesses has to be on the cards. There might be some loss of economies of scope and scale and in increase in transaction costs, but these are piddling compared to the costs they have imposed and are imposing.

Taxpayers will have to front up with the recap required, but they imdirectly authorised a lot of the madness – and many benefitted. But they will benefit ultimately from safer and more useful banks.

@ All


No comment…

Mmmmm….I’m not sure rational analysis applies any longer…Schäuble left the orbit of reality quite some time back…and Weidmann is with him:
Weidmann tells newspaper that
wrong to assume Italy on verge of
bankruptcy, optimistic Italy can
cope with bond yields of over 7
per cent

The above statement is simply disturbed…German position appears based on denying reality. Economic psychiatrists needed….


This is a definition of tragedy that I was compelled to learn off because of some minor boarding school misdemeanour many may years ago.

Tragedy is the failure of something not ignoble through inherent weakness or through inability to adapt to or to overcome circumstances over which it has no control.

I was never compelled to learn the definition of farce.

Of course Italy can cope with 7% +

Don’t you know that the flights and holidays are all completely booked out, the restaurants are full….. er, what else did you say Silvio?

If I were trying to turn a pig’s ear into a silk purse, I wouldn’t start from here.

We just need a French downgrade now to finish off the week.

I’m taking the weekend off to go and buy some tinned goods, bottled water and gold coins.

@Bond Eoin Bond

Thanks for the reminder.

Italy has a couple more auctions next week and 22m to find in December? Merry Christmas to that. Do you think the ECB might have to come off the bench as an ‘impact substitute’ next week??!!

@ PR Guy

selling around 6-7bn of term debt on Tuesday. Should be fun. Bringing the ECB off the bench at this point is a bit like those silly substitutions managers make in the 92nd minute. They needed to be brought on about 25 mins ago. Getting to the point where investors are fleeing peripheral (and now maybe core) Eurozone for the medium term, not just the short term. I expect some explosive anouncements from Draghi on the 8th Dec.

Since early August, it has been apparent to any rational observer, that Germany had an ideological position (not based on evidence) and that they were just ‘kicking to touch’ to avoid reality.

They have no cunning plan, nor understanding of where the Eurozone is, or is going to…just some vague atavistic fear of wheelbarrows of cash.

Now that the ‘super committee’ has failed the US has lost remaining moral power to intervene -the IMF already abrogated theirs by becoming a mere partner in the ‘troika’. There is no rescue coming from without. The last hope of certainty and order (be it an Ez disintegration or whatever), comes from within. But few countries, especially our own, have effective political leadership.

The last mechanism of action I see…is widespread bank funding failure/runs.

The Italian bond auctions may not have gone well today but at least Silvio managed to release his long awaited (?) CD of love songs.

It features such tracks as: “How old did you say you were again my lovely?”; “Is that a wire tap in your trousers or are you just pleased to see me?”; “Why do you always have to judge me?”; “The restuarants are full tonight shall we go to a Bunga Bunga party instead?”

I don’t have the full list. Do any of you know of any others tracks that may be on this masterpiece?

@ Paul Hunt

One has to ask the question; what is the major error being made by politicians in the handling of the bond crisis? The answer is that given by the ECB.

“For a domestic audience, banks should internalise the consequences of their lending decisions and should be punished for their past behaviour. But from a financial market perspective, such communication is disastrous. It signals to investors that assets that were previously risk-free are no longer so, that the euro area is a market where their investments are not guaranteed”.

The penny has dropped with all but the Germans. The question is whether the failure of the bond auction will also cause it to drop in Berlin.

An early change of direction seems unlikely. The leaked German negotiating paper states bluntly; “In the present ESM Treaty the possible participation by private creditors through so-called “collective action clauses” (CACs) is not sufficient”. In a word, in the eyes of Berlin, a treaty which has just been signed, and which will require a change in the existing treaties in order to allow Germany to ratify it, is already viewed as inadequate!

Water does not flow uphill! Market participants are not the total dummies the drafters of this position imagine. The description might well be applied to themselves.

It may be noted that the talks in Athens with the Troika are reported is being focused on the PSI element of the deal.


“They have no cunning plan…..”

I would disagree on that.
Until last Wednesday Germany had no difficulty borrowing at 2%, still has a huge export surplus, has all the liquidity of the continent flowing into its banks. What’s the problem?

In those circumstances you don’t need a plan. Only when Germans exports start to take significant hits with consequent dole queue rises does this crisis affect Germany.
Up to now this has been a very good crisis for Germany.
Why jump off a winning horse, particularly if the female jockey has impaired vision and does not see that a landslide has obscured the path to the finish line.



Weidmann is both right and wrong: he musta studied Hegel; right on the former, totally wrong on the latter. He must also know that the core/periphery distinction is now history; ergo, he is spinnin like a politico. We are all volcanic_kore now.


But the auction didn’t fail. The BUBA ended up with more bonds in the fridge than it normally would have, but that’s not a failure.

The effort being put in to suspend disbelief in Berlin and among the German cohort in Frankfurt is remarkable, but it will prove impossible to suspend it indefinitely. Perhaps Colm McCarthy is right. A downgrade of France may be required to get reality crashing in.

I think you may have highlighted the next phase of the crisis..the talks in Athens.
Most peculiar that they have not yet agreed the PSI and the 90% threshold. The IIF have gone silent and the markets are pricing a 75% haircut. The markets are getting this crisis right.

I see Olli Rehn on the Bloomberg ticker saying contagion might be spreading to the core countries.

Did someone just hand him the FT from 3 days ago?

Ye, that’s the really the scary thought – it’s already too late

The die is already cast.

Maybe the current situation is like Ireland in 2008 – we knew there was problems but few people truly appreciated the scale. Moreover, even if we had realised the extent of the problem there was little that could have been done, at least about the scale of the losses on the banks’ balance sheet. That was spilled milk.

Similarly, the problems in the eurozone may be to a certain extent intractable.

The only solutions available are not possible politically – not just, or even mainly, because EU leaders won’t do them or because they would take too long – but instead, because they require treaty changes that lack democratic support and would never pass through national parliaments and/or referendums.

We are hamstrung by the limitations of the constitutional structure of the EU and the lack of democratic support for closer integration

@ Paul Hunt

I would like to know what your definition of a successful bond auction is.

The point that I am really trying to make is that the next few weeks up to 9 December will see some very difficult negotiations on a disparate package of elements against a background of an increasing sense of crisis. But the latter should not be allowed to obscure the former. Resolution of the PSI issue is the most crucial element and, in my view, the one to watch (assuming the roof does not fall in beforehand, which I would consider rather unlikely).

Good summary. We will know shortly the treaty changes being proposed. It is difficult to see them being approved by 27 states. If the changes don’t go far enough the markets will again react and if they are radical it is likely that they will be rejected politically. I cannot see Britain going along with a financial transaction tax.

Sitting in reception at a building in the IFSC this afternoon, waiting to go into a meeting, minding my own business and reading their papers, I noticed some wag has taken a pen to the picture on the front of the FT today (Press conference, standing at podiums, Merkel with left hand pointing to Sarkozy, Sarkozy with left hand pointing to Monti, Monti standing there looking like someone had just pinched his bottom): speech bubbles coming out of respective mouths –

Merkel – ” I don’t know. Ask him”

Sarkozy – “No. Aks him.”

Monti – “Sell. Sell everything. Do it as quickly as possible. Get out of the Euro now while you can. Buy anything but Euros, EZ bonds or risk assets. Don’t keep your money or gold coins in banks. Put it under your mattress at home. We’re all doomed I tell you. Doomed.”

As I was reading it, their CFO came out and asked me if I had done that! “WTF?” I said. He then said if it wasn’t so serious, it would have been the funniest thing he’d seen in a while but thought I had done it because none of the people in his organisation had yet woken up to just how dire things are!

Even the accountants are worried.

It seems they are waking up…

Nov. 25 (Bloomberg) — German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed with Prime Minister Mario Monti that Italy succumbing to the region’s debt crisis would lead to the end of the euro, Monti’s office said.

Sarkozy and Merkel “confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro,” Monti told ministers at a Cabinet meeting in Rome today, according to an e-mailed statement. That “would provoke a stalemate in the process of European integration with unpredictable consequences.”

Sarkozy and Merkel “confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro,” Monti told ministers

Presumably that was the full Monti.


“they are aware that the collapse of Italy would inevitably lead to the end of the euro,” Monti told ministers at a Cabinet meeting in Rome today, according to an e-mailed statement. That “would provoke a stalemate in the process of European integration with unpredictable consequences.””

I’m not sure if that’s a case of stating the bleeding obvious or an understatement… or both.

I think they’re asking a lot of Monti if they think he’s going to be the saviour of the Euro.


I obviously failed to convey tongue firmly planted in cheek.

But you’re right. Where no risk was seen previously, everything is now seen to be at risk – and everyone is running for cover and safety. Except of course the ‘disaster capitalists’ and vultures who are eyeing oodles of distressed debt and assets.

@ Ceterisparibus

The issue of treaty changes leave the markets cold. Whether changes go too far or not far enough is a matter of indifference to them. By the time they are implemented, in any case, either the situation will have improved or the euro will have collapsed.

What will certainly happen on 9 December is that some kind of mandate for negotiations will be agreed, of no relevance to anyone other than Merkel and her latest grand plan, but the real issues will be elsewhere. What the heads of state and government make of them will be decisive for the markets. It’s about the money! cf.

We need something to get things moving again in Europe..maybe a European Black Friday where everyone shops till they drop. Max out the credit cards and maybe even issue promissory notes or other specie to get the economies going. All this doom has to be counteracted. Just look at the USA today…they are spending like there is no tomorrow and even using pepper spray to stop queue jumpers and the DOW goes up dragging Europeean markets with it.

Friday Rumour via Twitter

“#Spain studying outside aid. If it needs help from IMF/EFSF, best to go fast and blame on previous government.”

On Spain

Eurozone crisis: Only Eurobonds can save us

24 November 2011 El MundoMadrid

the .. er .. bovine ring

Bit rude of the Germans, French, and Italians not to invite the Spanish to yesterday’s brunch – little wonder they are peeved!

Personally, I was hoping for a notch on Gaul, and a wee bonus from Blind Biddy’s Hedge Fund. Prob have to do with a letter of comfort I s’pose, and a ticket to view Stringer line out for The Barbarians.

“Spain studying outside aid”

Maybe colonialism will make a return. Spain could do a reconquista of South America and solve a lot of balance sheet problems .

As I suggested, Angela has done her focus groups (well before this poll):

From Kamal Ahmed, Sunday Telegraph Business Editor:

@kamalahmed1 So, that’s why Angela Merkel has set her face against eurobonds – ZDF poll: 79% of Germans against eurobonds via @OpenEurope

“Between August 2009 and May 2011, German exports jumped by 18 per cent. A reasonable estimate suggests they would have risen only 10 per cent if Germany had been outside the euro.”

Between the same period (well Q3 2009 – Q2 2011) Irish exports of goods and services increases by 18.5%.

35,570 in Q3 2009
41,946 in Q2 2011

Has anyone else noticed, but our principal contributors, at least the few who stir the pot, seem to have gone very quiet? I know they’re busy, but it’s a bit eerie here.

Once the Euro holds in some shape or form – and I reckon the northern hard-liners will do what needs to be done…eventually, all this continental fever has little impact on Ireland while it remains under the Troika’s umbrella. In the medium term sorting those darned promissory notes and the ECB’s (+ICB’s) ‘liquidity’ support would be a help, but it would be good if there were some evidence of serious effort being made on structural reforms.

But it is unlikely. The government is keen to differentiate its product from the offerings of the other PIGS with steady governance and minimal public disaffection or dissent. Another that might provoke some protest from the pampered rent-seekers is verboten.

Maybe I’ve got the wrong end of the stick but if the EZ is considering dropping PSI in the ESM won’t that potentially put even further strain on sovereigns (and put existing AAA ratings at even more risk of a downgrade)?

I suppose it’s a good job I don’t work for Moodys/Fitch/et al if I jump to conclusions like that.

@ Paul Hunt
I had noticed. Now that the crisis has gone viral, you would expect a comment from John Mc Hale as to the status quo position he advocates.

This ESM news is a game changer. What happens Greece. They cannot even agree the current haircuts. Amazing that they haven’t run out of money…yet
If memory serves me correctly, they were supposed to run out of cash in October. Evangilos must have a hidden stash.

Hard to know. Apparently everyone bar the Germans,Dutch and Austrians are in favour of dropping CAC.
But if you think about it….trying to sell sovereign bonds with a clause that states you might not get your money back is pretty daft. Nobody in their right mind would buy them when they can buy other sovereigns with such a stipulation. It’s effectively turning sovereign bonds into equities without the potential upside.


“they were supposed to run out of cash in October”

Another of the great lies, like the… “we are fully funded until”… “the cheque’s in the post”… I’m sure you know the others.

But it’s still a good question: what will happen about Greece? I still have worries about Portugal too. Good article in the FT today about how the Portugese appetite and ability for reform is about on a par with Greece. My guess is that’s the reality in Spain (and probably Italy) too. Perhaps I shouldn’t exclude Ireland from that list?

“Has anyone else noticed, but our principal contributors, at least the few who stir the pot, seem to have gone very quiet? ”

Now everything is political economy. Would that be it?


“trying to sell ….with a clause that states you might not get your money back is pretty daft”

I look at the small print in many consumer insurance, investment, etc. contracts (e.g. unit-linked ones) for clients and I think they nearly all say something to that effect 🙂

…and yet they still sell by the bucket load. The ESM obviously need to get a couple of dodgy life and pensions salesmen/marketing people on the payroll !

Re Germany is the real winner

Is fearr an mhaith a ta ‘na an mhaith a bhi.
Present good is better than past good

so how good is the present German situation ?

“Euro area a place where investments are not guaranteed” and disaster capitalists.
That any serious politician could say, with a straight face, that it’s a bad thin investments are not guaranteed is a sad sad reflection of where we are. And the solution for the disaster capitalists? Let them win and see what they collect. Cos that is really the problem, the system is so hopelessly leveraged to accommodate every possible trading strategy, there is no way these disaster capitalists could possibly collect in a collapse scenario. The idea that we should look at the banks to determine exposure is so basic that it is impossible to believe that it has not been attempted. More likely is that they peeped under the losses tarpaulin and saw a festering mess, too big for anyone to deal with.

The lie at the core of the whole system is that there is a “solution” and we often accuse the Germans of irresponsibility or of not understanding, when in reality we are hoping that, with one last double down, we can ahead of this crisis. Commentary that looks only at how Germany has benefited from the Euro and therefore owes us, are disingenuous. They fail to take account of the moral hazard and they refuse to say whether German help will be enough to solve the problem.

Maybe that is beside the point, maybe the real point is to allow the disaster mongers and the super leveraged a means to cash out.

Bloomberg reporting Greece demanding private investors take larger losses…hence the about turn in markets.

They are at it again….

@Paul Hunt / Ceteris

Has anyone else noticed, but our principal contributors, at least the few who stir the pot, seem to have gone very quiet?

Yes, I had noticed that. But I assumed that all government effort last week and this week was directed to that most essential of tasks.
Ensuring that Kevin Cardiff got the plum job.
All diplomatic and networking resources are being deployed to the main task at present.

The rest of the nation and economy must queue up in line of importance, or line of unimportance as appears to be the case.

How many trillion euro has been wiped off EZ wealth by not solving this crisis? A lot more than fixing the problem. Then add to that what will happen growth. Merkel needs a kick up the arse. Does she think it’s a zero sum game. Faffing around makes the problem worse. Now Italy looks gone and Spain isn’t far behind. Does she actually think that austerity across Europe is a good idea? Bonkers, let’s get some sort of austerity-spiral going.

Is Weidmann a troll? I wonder if you told him that German policies are weakening the euro and therefore inflationary cause his head to explode.

Well, at least I feel a little better now 🙂

“A lot more than fixing the problem” how do you know that? Just a reminder, the irish had that view when the guaranteed bank debt in 08

Caution is advised..look what happened to berlusconi when he commented on the lady’s derrière.

Portugal not the only downgrade to ‘junk’ – spare a thought for the Hungarians – and with freeze in Austrian Banking expect a few more ..

Hungary’s bitter reunion with the IMF
25 November 2011 Magyar Nemzet Budapest

Financially weakened, Budapest has requested assistance from the International Monetary Fund, as part of a deal to be negotiated between now and January 2012. The Hungarian press wonders if the move amounts to an admission of failure on the part of Prime Minister Viktor Orbán, or if it has resulted from a cabal against his independence policy?


Have another think about this will you.

“One has to ask the question; what is the major error being made by politicians in the handling of the bond crisis? The answer is that given by the ECB.

“For a domestic audience, banks should internalise the consequences of their lending decisions and should be punished for their past behaviour. But from a financial market perspective, such communication is disastrous. It signals to investors that assets that were previously risk-free are no longer so, that the euro area is a market where their investments are not guaranteed”.”

Saying that these assets (unsecured long-term lending to banks, that could under no circumstances be withdrawn until the redemption date) are / were risk free, over and over again, does not make it true. It is ECB and bank industry spin.

Actually, what most investors really did regard as as near as made no difference “risk-free” assets were Sovereign bonds.

As for “But from a financial market perspective, such communication is disastrous.”…er, hang on a mo, haven’t we actually witnessed the banking lobby manipulate states into laying the banks’ risk onto the sovereign thereby ‘disastrously’ risking-up the genuine ‘risk-free’ bonds?

“….. that the euro area is a market where their investments are not guaranteed””

What!? I must have missed this ‘guarantee! Just don’t recall reading it on any term sheets over the last 25 years. Should I have gone over them with a hot iron? Were there bits that were written in lemon juice?

It is part of the regular function of analysts to estimate risk. It is one thing for people to hold up their hands and say “Sorry, a lot of us badly underestimated the risk here, as a result of which we allocated way too much way too cheaply for onward lending by the banks – and that did a lot of damage to the economy of Europe and beyond. We regret that, but would point out that if we and out clients have to take 100% of the losses that follow, that too will damage the economy further. We would humbly suggest that some sort of loss reduction be funded by taxpayers (both directly, and, we recognise indirectly by way of consequent higher state funding costs) be considered to prevent that further damage.

It is quite another to retrospectively invent guarantees and then try to blame the mess on people who don’t immediately and unquestioningly join in the pretence.

It really is the Emperor’s New Guarantee.

From that article..
““We have to face facts,” adds the newspaper. “A year and a half ago, when he could do virtually anything in this country – and he very nearly did – he gave full powers to a shaman,” the Minister of National Economy György Matolcsy, “whose phantasmagoria he used as the foundation for his national self-determination policy. The strategy certainly had its charms, but stupidly caused a lot of harm to people and Hungary, and made us the laughing stock of the world.”

I wonder if any of our guys have some of that phantasmagoria thing?

It seems Greece may be the catalyst for a meltdown..

From Bloomberg
The demands of Greece now totally change the game,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said in an e-mail. “The situation can no longer be called voluntary by any stretch of the imagination. The equity markets in the United States may test the lows again as there is increasing concern of a major recession in Europe.”

If the reports are correct then the haircut will trigger CDS contracts with unknowable consequences. I knew those Greeks were being too quiet.


Watch out. Don’t know whether the journalist is fully aware of the difference between PSI for existing holders before ESM funding in order to make a state ‘sustainable’ in terms of its debt – and CACs to be included in ESM era bonds, which would provide more clarity about how those new sovereign bonds might be restructured at some point in the future.

There was a major run towards FRNs this week after the Dork mentioned he was becoming a FRN bug.
Sorry about that lads……………..
If I had to guess “they” will stabilize the situation next week somehow.

The Euro needs a higher Gold price if enough Euros are to be available for efficient exchange & debt payment.
Just saying like.

So the PP, which lost 7 years of power by blaming the Basques for 11-M, now thinks that they can put Spain into administration by blaming the PS. Spite is not the most advisable policy rationale.

Habermas, the Last European

A Philosopher’s Mission to Save the EU

Jürgen Habermas has had enough. The philosopher is doing all he can these days to call attention to what he sees as the demise of the European ideal. He hopes he can help save it — from inept politicians and the dark forces of the market.

Jürgen Habermas is angry. He’s really angry. He is nothing short of furious — because he takes it all personally.,1518,799237,00.html#ref=nlint

@ Grumpy & Ceteris

This issue has been bubbling around in the background since earlier this year and represents the most egregious of the errors made by Berlin. But reality seems to be biting.

Indeed, the options were in the public domain already in March courtesy of a leak of the draft treaty by Open Europe.

It would probably be a question now of agreeing to the relevant recitals (i.e. not in the operative part of the treaty) and deleting Articles 12.2 and 12.3.

Meanwhile, a lot of water has flowed under the bridge and the european bond market put close to destruction.

It may be noted that, from various contributions to this blog, that not everyone saw the wisdom of the position adopted from the outset by the ECB.

@Paul H

“The effort being put in to suspend disbelief in Berlin and among the German cohort in Frankfurt is remarkable, but it will prove impossible to suspend it indefinitely. Perhaps Colm McCarthy is right. A downgrade of France may be required to get reality crashing in.”

I think the markets which are not pricing directly off sovereigns – most importantly equities, are not going down because there is an assumption that Germany will cave, because it is assumed they would not be willing to bear the consequences of doing otherwise. Currently though, I think Germany will not cave, because it has a fairly clear approach, that it is being very open about, and it can see that this is not causing panic. It therefore concludes that it can continue to do what it has been doing.

Irt is therefore a bit of a phony situation. If you can orchestrate the Dax to spend a week or so below 3500, or get a five day moving average of this:
above 85, then Germany will probably sign up to anything you like.

At one time there was no “Irish” , just a collection of tribes although the Romans may have referred to us as a collective if they were sufficiently far enough away from our shores………
After the Cabinet Wars the nationality meme was transplanted into our little redneck heads.
These guys just want to go on another great & profitable adventure – the trouble is such a large construct needs a higher energy density and at the moment we ain’t got it.
If they push the old model into the abyss they will end up with nothing and we will be eating Gruel 3 times a day.
It will be a interesting but short stunted life.


Is there a relationship between the SovBond Market and the Equity Market …. or are they parallel universes? I realise it is probably a slightly constitutional question … but not everything, apparently, is volatile.


The highest yields are between 1 – 5 years, so likely one or two of these. Wouldn’t be the 10 y.

@David Od

Yes there is, but it is different from one decade to another! The ‘yield gap’ (bonds – equities), then the ‘yield ratio’ (bond/equity) used to be very reliable for working out when one market was cheap against the other. Thing is the ranges are wide, and to use them you have to be convinced an extreme is not a move to a different, more appropriate range to reflect inflation, equity risk etc.

Just spoke to a buddy at Reuters. Seems pretty strong on this story about new government in Spain looking for a bailout (of sorts). Can you have a limited bailout? An IMF line of credit?

“Currently though, I think Germany will not cave, because it has a fairly clear approach, that it is being very open about, and it can see that this is not causing panic. It therefore concludes that it can continue to do what it has been doing.”

Spot on.


Saw something today about Spain setting up a bad bank. Could be connected.
Maybe they are facing up to their property bubble. Santander is under pressure and selling stakes in the crown jewels in South America.

“What fu**ing Indians?” – General Custer

That’s apocryphal, I presume. There was however a Union general in the American Civil War whose last words (concerning rebel snipers) were: “They couldn’t hit an elephant at that dist–“


thanks for the link to JH, I am particularly pleased to read that he uses the very same terminology that I am using since a few weeks on DMcW blog… Coup d’État

How about his report from the Telegraph

“He reports that, according to Merrill’s model at least, a break-up may not be as traumatic as everyone assumes:
The conclusion is that Spain, Italy, Portugal and France are all overvalued against the US dollar as things stand, with Spain the most at around 20pc. That’s not so surprising, you might say, and if anything probably understates the true position.
But look at the countries thought to be undervalued.
Ireland, on the Merrill Lynch analysis, is the most undervalued even though it is undoubtedly completely bust, while Germany, which conventional wisdom would say was massively undervalued as a result of its membership of the euro, is actually only quite marginally undervalued – by around 5pc.”

Are Merrill Lynch completely and utterly bonkers?

The Americans are bailing out of Europe big time….

“U.S. heavyweights Goldman Sachs, Morgan Stanley and J.P. Morgan considered the risk involved in Unicredit’s offering too great for the potential reward on offer, according to a report by IFR, a Thomson Reuters publication.”

A song for Frau Merkel

hit her like a train on a track
Coming towards her, stuck still no turning back
She hid around corners and she hid under beds
She killed it with kisses and from it she fled
With every bubble she sank with a drink
And washed it away down the kitchen sink
The dog days are over
The dog days are gone
Can you hear the horses
‘Cause here they come

On an “I told you so” basis I’m reposting this, from 8th June last:

June 8th, 2011 at 8:01 pm
Germany is also a huge beneficiary from its benchmark/safe haven status within the Eurozone, in terms of its cost of funds. The average yield on its bond/bill debt of over €120bn is below its inflation rate; it is also well below the Eurozone average (ex Germany itself, Portugal, Ireland and Greece).

Of course the yield on existing debt means little of itself but, when one notes that over €40bn, or 34% of its outstanding bond/bill debt (plus an estimated €50bn of new debt due for issue) requires financing or refinancing by end-2012, at current yield levels there is a saving to accrue to the German taxpayer, probably in the order of €4bn+ p.a. over the lifetime of this borrowing.

And, being in the eurozone, Germany as a net exporter benefits from a significantly more competitive exchange rate than it would under a NeuDM – all the low interest rate benefits of a reserve/safe haven currency, without the drawbacks of an overvalued exchange rate.

It’s another counterbalance to the Bild/Merkel view of thrifty burgers being taken advantage of by feckless peripherals.


ta for that – amazing what one can learn on this blog at times ..

@Georg R Baumann
Glad you enjoyed Jurgen – Pity he isn’t President of the Commission

Now what was that advice Merril Lynch provided to an Irish Gov a few years ago, and ignored with the result that we are on this blog ….

no probs with guaranteed sovereign bonds – collective EZ and ECB can handle this – I’m Vehemently Opposed to Guaranteeing any PS bonds, and particularly Bank Bonds ….

@all wonder who Nikki paid off to keep Dexia downgrade tied to the Gaullish wing of Belgium? We need a notch on Gaul before Dec 8th …. and somebody might remind the Irish Gov of the significance of the anniversary of December 6th.

I wouldn’t write of German bunds just yet….look at 6 months 0.14%and 5 yr. 1.25%… Wouldn’t we just love these rates.

3-Month 0.000 02/15/2012 100.00 / 0.25 0.000 / 0.003 11:57
6-Month 0.000 05/16/2012 100.03 / 0.14 0.005 / -0.010 11:59
1-Year 1.000 12/14/2012 100.82 / 0.22 0.065 / -0.064 11:59
2-Year 0.250 12/13/2013 99.58 / 0.46 0.020 / -0.010 11:59
3-Year 2.500 10/10/2014 105.24 / 0.65 -0.010 / 0.002 11:59
4-Year 1.750 10/09/2015 103.14 / 0.92 -0.095 / 0.024 12:00
5-Year 1.250 10/14/2016 100.10 / 1.23 -0.195 / 0.041 11:59
6-Year 4.000 01/04/2018 114.32 / 1.52 -0.300 / 0.047 11:59
7-Year 3.750 01/04/2019 113.08 / 1.78 -0.415 / 0.057 11:59
8-Year 3.250 01/04/2020 109.80 / 1.93 -0.535 / 0.068 11:59
9-Year 2.500 01/04/2021 103.46 / 2.08 -0.615 / 0.073 12:00
10-Year 2.000 01/04/2022 97.67 / 2.26 -0.610 / 0.069 11:59
15-Year 6.500 07/04/2027 146.35 / 2.80 -0.830 / 0.051 11:59
20-Year 5.500 01/04/2031 136.61 / 2.97 -0.775 / 0.043 11:59
30-Year 3.250 07/04/2042 108.72 / 2.82 -0.525 / 0.024 11:59

It seems the Greeks are looking for a 75% discount on their bonds. Will angela launch another Exocet …she can hardly remove her own appointee already.
More chaos Monday looks inevitable.

The Americans are bailing out of Europe…..

But how do they bail out of the stuff they already wrote? The CDS contracts who sits as counter party to them? And the hedge funds that buys the EU debt from the US bank are likely using money borrowed from those same banks for funding. Neat set up …. till it stops working. And it has stopped working.

The system is eating itself up, from the inside out … And if Merkel doesn’t put Germany’s taxpayer on the hook to bail everyone out …. Well, you know!

A link to an article in Der Standard, Vienna (Wien), Austria.
I interpret the gist of it to be that Germany will cave but not before wringing concessions from the overly indebted countries.
Google translate does a reasonably good job.
Take into account that according to an article of faith in the Austrian School bible all credit booms end in collapse and doom. Reminds me of the Janis Joplin song Total Eclipse of the Moon.

I swear to god tis true, I actually saw it with my own eyes.
All our troubles are over. We can pack them up in our old kit bag and smile, smile, smile.

From the BBC website – “The US holiday shopping season gets off to an ugly start with several shootings and two pepper-sprayings as bargain-hunters stampede stores. ”

I dread to think how they would react if there were nothing to buy in the shops or they had to queue for hours just to get a loaf of bread and I can’t imagine Europeans would be much different other than it’s more difficult to get your hands on a gun or a pepper spray over here.

At least the old East Germans knew how to queue for bread and fresh fruit with quiet dignity and without shooting each other. My guess is they’ve probably lost that ability and they sure as hell aren’t going to let any Greeks, Portugese, Italians, etc. put them back in that position.

PR Guy

The ILP bondholders are being protected. Nothing new there.

Irish Life is going to remain in the hands of our (dubiously solvent) state for the foreseeable because conditions in the EZ have deteriorated to the point where global capital is shunnig the area.That is bad news for its policyholders, and our financial sector more generally.

All part of the big picture, which is not a pretty one. The governement was lucky to get the Liberty Mutual deal done before the s**t hit the fan.


Your view that Germany is somehow seeing the error of its ways and conceding that PSI was an “egregious error” is something that no doubt you would wish to be true, however as far as I can see there’s no evidence of this at all. Perhaps you may be able find what Schauble actually said and find a primary source, but from English language sources I’ve seen what he said was that the ESM treaty is already agreed and in place, and if that were to change it would be in the context of a new treaty on a Stability Union.

Now we know from the leaked German finance ministry document (which you also linked to recently, and quoted from above) what the Germans have in mind when they talk about a Stability Union:

The instrument of the ESM is not sufficient. It requires real intervention rights in the budgets of those euro member states who are encompassed by the ESM’s programme, and who potentially place the stability of the eurozone at risk. The ESM must also be capable of executing an orderly default of a eurozone member state. These two steps would allow the ESM to really become an “EMF”.

In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europewide rules on bank restructuring.

The difference between the ESM language on default and Stability Union/”EMF” language on default is that the latter is more detailed, and recognizes that a plan to handle the banks is needed in terms of resolution, restructuring and recapitalizaton. It is clear that they are modelling the EMF on the IMF, which requires forced restructuring when the debt is seriously unsustainable (as in Greece):

In exceptional cases, the IMF may come to the conclusion that debt sustainability cannot be
achieved through policy adjustment. If so, the IMF is precluded from providing further financing without assurances that the country is negotiating a comprehensive debt restructuring plan with its private creditors.

So rather than discarding PSI, I’d say that they are developing it further, with IMF-like criteria as to its usage.

The banks and non-AAA countries simply want the AAA countries to write a blank cheque and rule out PSI, proving Weber’s dictum that all solutions are based on “How can I use other people’s money to help myself?”

@Mickey Hickey – “Reminds me of the Janis Joplin song Total Eclipse of the Moon.”

No such song by Joplin. You thinking of the bombastic “Total Eclipse of the Heart” by Bonnie Tyler?

@ Bryan G

This is what I said.

“This issue has been bubbling around in the background since earlier this year and represents the most egregious of the errors made by Berlin. But reality seems to be biting.

This is your interpretation of what I said.

“Your view that Germany is somehow seeing the error of its ways and conceding that PSI was an “egregious error” is something that no doubt you would wish to be true, however as far as I can see there’s no evidence of this at all”.

I have no doubt that Merkel and Schaeuble remain convinced that they are right. It is not just my view that they are in error but that of the ECB. It is, to give an example from the most recent statement by a member of the ECB executive board, rather unusual to hear a central banker use the word “disastrous”. I am simply noting the fact that the matter remains up for negotiation against a background which has not moved in Germany’s favour.

One thing is certain. If there is to be a major U-turn by Germany, every effort will be made to camouflage that fact for obvious political reasons.

The ESM issue has also now clearly become one of manouevring on the budgetary implications ahead of the federal elections. Merkel caused great embarrassment to Schaeuble some weeks ago by forcing him to reopen the agreement on the financing of the ESM to spread Germany’s capital contribution over a five year period.

@PR Guy/ Paul Quigley

Have we gone utterly and totally raving mad?

Yes . Bonkers. Pay four billion to get one billion. In fact we can’t even get one billion.
Why? Because the ECB and Germans say so.
They loan us the money. Its called aid. We then put the money(all four thousand million) into ILP to pay the bondhholders. We then get one billion for ILP, if we are lucky, and by the way we have been mandated to sell it.

This is a shakedown on behalf of German and the ECB’s favourite banks. It always was a shakedown. An out and out fraud perpetrated by the very people who now propose to run our country under a new treaty which will give them plenipotentiary powers.

We did not even have the liathroidi to object.
Now if a plum European job was at stake, we might have the temerity to muster a diplomatic offensive. All mouths blazing. That sort of thing.
But this matter was not that important to the last two governments.
They were on the inside making money. Smart boyos don’t jeopardise their pockets.

@PR Guy
It’s not quite that bad – Permanent TSB, the bank, needs four billion so was planning to sell Irish Life, it’s life insurance subsidiary to raise some of the cash. 

This is a continuation of the disastrous foot-dragging strategy employed by the Irish banks to avoid ‘fire-sale’ prices [read: market prices] for the larger non-core businesses they are obliged to sell under EU and Irish gov’t plans. 

Clearly it’s not a great time to be in the market selling a financial business, but for once the Irish banks were ahead of the curve by starting several sales process in April of this year – if IL&P tries to sell Irish Life again next year it’ll be competing with the non-core asset disposals of every bank in Europe which are now desperate to de-lever – and the business will be worth even less. 

I expect we’ll shortly hear that BoI’s Burdale sale has also fallen apart because of ‘market conditions’ also, together with a couple of other ongoing processes (AIB abandoned the sale of it’s UK operations this time last year for the same reasons, I shudder to think how much less it’s worth today). Then the management teams in the banks can shrug their shoulders and say “well we tried” secure in the knowledge that they can keep the empires they’ve built and taxpayers will fill their funding gaps.

It’s looking like a big Euro bank is going to blow soon.
Will be very interesting to see how it’s handled.
Can ECB money ever be used to bolster the capital requirements of a bank?

Italy cannot be allowed to fail, if it does the whole house of cards will come toppling down. A world wide recession would be a likely outcome. The failure of Greece, Portugal, Ireland presented little risk to the world economy other than as an indicator to the world that the EuroZone as a whole was unwilling or incapable of forcing or cajoling failed states back into line. It is the appearance of helplessness on the part of EU institutions that is at the root of mounting instability. New treaties taking five years to implement with any state having the ability to nix the initiative is laughable in the present circumstances.

The only positive is that the EZ is now being forced to get its act in gear as the prospect of failure looms larger.

I saw a link (probably here) a couple of days ago to a book by Garet Garrett titled The Bubble That Broke the World, it dealt with the behaviour of France, Britain and the USA toward Germany after WW1 and the German hyperinflation that resulted in Germany’s inability to service reparations and sovereign debt. The paragraph Rescue of Germany has added interest today.

I know it is Von Mises Institute propaganda but in the same way that Marx had insight Von Mises can also be credited with nuggets of wisdom. As they say in Kerry you have to balance them all off.

Re: The Bubble that Broke……

The paragraph titled Book of Debts after page 160 is also of interest.

@Edward v2

Lots of people bought into the “fire sale” mantra. I think the moderators of this blog should organise a thread dedicated to “fire sale prices” so I TOLD YOU SO! could be typed by many contributors in capital letters, over and over.

Just saying like.

@Edward v2

re “It’s not quite that bad – Permanent TSB, the bank, needs four billion..”

Really? Pay four billion to get one billion. Do so deliberately with eyes wide open.
The Bank of Ireland sale was the same. It was finally reluctantly extracted from the all the positive spin that the ‘haircut’ was ~75%.

I am watching and dealing with businesses and lives being destroyed on a weekly basis by the actions being taken.
With respect, it really is quite that bad.

@ Joseph Ryan

I think there’s some confusion here about the numbers. As part the PCAR stress tests earlier this year, the banking part of Il&P was found to be 4.0 billion short of capital. Their plan was to raise 2.9 billion from taxpayers and they assumed they could raise another 1.1 billion by selling the non-core and non-banking life insurance arm, Irish Life. Now it seems they are not minded to sell Irish Life for what it is worth today so they will raise the full 4.0 billion from taxpayers. There is no 1 billion for 4 billion going on here. IL&P and taxpayers will still own Irish Life as well as the banking side PermanentTSB. 

If you’d read past the first 12 words of my post, you’d see that I’m most certainly not arguing for taxpayers bailing out financial institutions. I was merely trying to straighten out that Irish Life is part of IL&P, not the whole thing.


I appreciate that you are are not in favour of the bailing out bondholders
That said. Yes, I was wrong on the numbers. On further looking they are worse than I thought.

The State will now pay a balance of 1.3 billion making a total of four billion for a organization that it cannot sell.
An organization that is worth nothing on open market.

So that ‘we’ can get back into the markets. Markets that effectively no longer exist for the majority of EZ countries and definitely no longer exist for all EZ banks.

However, even at this late stage I would not put the money into ILP or any other bank. I simply would not not do it.
If the Kevin Cardiff ‘nightmare scenario’ of no money in the ATMs was the result, so be it. At least Iceland had the guts to deal with that situation.
If fact as our ‘Pillar’ banks are simply national debt collection agencies for the ECB, I would do an Iceland on them too.

@The Dork of Cork
Thanks for the link to Credit Writedowns, quite informative.
I found a reference there to Abba Lerner the monetary theorist and originator of the NAIRU concept, who was the inspiration for “scrip” recently used in Argentina by some provinces during their 2001/2002 meltdown.

@ Joseph Ryan

I agree whole-heartedly. I wouldn’t have put a penny into the banks then and wouldn’t do it now.

@Joseph Ryan
The gov’t has difficult problems to deal with that result from not putting insolvent companies into receivership and bankruptcy proceedings. That would have had a cleansing effect that would not leave Euro7-8 billion of Anglo entanglement overhanging the company (albatross like) now. The receiver could have been the Regulator preferably or a party retained by the Regulator giving the gov’t at least some small say in the area of policy holder and depositor protection. Assets of Euro 32 billion under management is at risk. With ample precedent the taxpayers are back stopping it.

@Mickey Hickey
I thought this snippet from the link you posted to be informative..

Barroso fühlt sich von der Bundeskanzlerin verraten
German daily Die Welt says Barroso and Merkel’s relationship is in tatters over her dismissive treatment of his Eurobond proposal, rejecting it even before it was presented.

Did not catch that – Harrison more then hints that the Monetarist / Keynesian dynamic is obsolete as in my opinion both schools of thought try to bring wealth from the future without concerning themselves with building the core capital base.
These schools of thought was dependent on rising oil output beginning in the 20s with the rise of the Dollar as America was both Saudia Arabia & China rolled into one back then , after 71 it externalised the dollar and outsourced production to remain the reserve currency.

If / when this crisis is over the Austrian / MMT economic dynamic will be the primary economic clash with Full money men considered the remaining radicals which will perhaps come to the fore in the next great crisis when we are all dead.
This clash is ongoing in the markets with the Dollar / Euro / US treasuary IMF / ECB BIS gentlemans war although the Euro has nothing to do with the Gold standard as often stated – its just the ECB engaging in radical sociological experiments because they can given the vaccum of political force & structure withen Europe.
The Euro is more like MMT using Gold – but the guys running this shop are refusing to produce enough money – thereby destroying the Euro economy and therefore transfering the oil surplus to the US / China.
Gold Bulls need to cover or hedge their position with $$$$ if this continues.


The ECB have always been very strongly opposed to any PSI, particularly for private debt, and also for sovereign debt. Yet another speech restating this position is to be expected.

EZ split over private sector role in debt rescue fundis a current report that indicates that the issue is being discussed but that everyone is just restating old positions:

France, Italy and Spain want to remove a clause from the EU’s future, permanent rescue fund that would make private sector investors take losses as part of bailouts, the sources said, confirming German newspaper reports.

Europe’s paymaster Germany, backed by Finland and the Netherlands, insists on keeping the clause requiring a private sector role in the ESM, another diplomat said. “The debate is not new and it has taken place within the eurozone for a while,” the source said.

I very much doubt that Germany will do a U-turn on this and abandon PSI from what is planned to be Europe’s permanent rescue facility. It is not just a question of getting through another couple of weeks (which seems to be the general approach of France, Italy etc.), but of designing a new EZ infrastructure. The principle that EZ taxpayers as a whole should just write a blank cheque and cover all future sovereign debt is never going to be accepted by the strong AAA countries.

@ Bryan G

What matters is not how often an argument is made or by whom but whether it is right or wrong. The markets are proving it to be more and more right with every passing day. Indeed, the Greeks are taking maximum advantage of this fact in their negotiations with the Troika on the issue.

We know that the debate on PSI is not new. But it has not been resolved. We also know that the EFSF, as currently designed, is not going to work unless the broader confidence issue is also resolved. One real runner is the idea of bringing the ESM in next year rather than on a date where Merkel, triumphant, could tell her electorate just prior to the federal elections how successful she had been in her European “policy”. Berlin cannot have its cake and eat it, a course on which it has been embarked from the start of the crisis and which has made the situation nearly irretrievable.

There can be little doubt about the fact that the finance ministers meetings next week will involve real negotiations, rather than diktats.

This what Rehn said in Rome.

“However, he underlined the need for a “community method” in building this fiscal union, rather than “directorates of two countries or more”, and stressed that Germany would have to co-operate with its partners.

“As Mrs Merkel wants to decide a fiscal union, the German government will have the pleasure to negotiate with the other 26 members of the EU and the other 16 members of the euro zone, as well as the Commission … when decisions of fiscal union and economic union are taken,” he said”.

How these negotiations will turn out, I do not know. But all involved – except, perhaps, Merkel – seem to be aware that Europe is drinking in the last-chance saloon. Indeed, this is the biggest risk i.e. that she will stick her oar in as she has on many other occasions at critical junctures simply to show who is the boss.


Your tireless (and one can only assume selfless) advocacy for the interests of bondholders in the financial sector is truly a thing of wonder.

I wonder why it is so difficult to accept that a problem fundamentally caused by the international financial sector will not be solved without a fundamental reform of that sector, and that necessarily people who made poor investment decisions will have to accept the consequences? Why must financial capital be so coddled – why not engineering or something productive (or at least no destructive)?

So, basically what Grumpy said.

This might be an interesting analysis:

Quote from it:
“Ilargi: We need to start allowing both Eurozone countries and European banks to default. Restructuring where possible, bankruptcy where not. The road we’ve been on for the past 3-5 years is a dead end street, always was. The wall at the end of it is now right in front of our faces. Want to risk running forward? Throw another, oh, $10 trillion at it to see if anything sticks? Doesn’t seem wise, does it?”


Remember that the starting point is an agreed treaty – the ESM – where Germany has a veto (as does everyone else) for all the large decisions, and also has a veto due to its weight for all the QMV decisions. I guess that the broader EU could force a change to the ESM treaty itself over the objections of Germany and the top AAA countries, since those countries don’t have a blocking minority under Nice or Lisbon, but such a decision would in effect be unworkable. and won’t happen. Germany does not have to discuss the PSI provisions in a Community-method setting.

The only alternative to PSI is no PSI, which means a blank cheque from the taxpayer (assuming the ECB keeps its current position against monetizing the debt). Extracting an unbounded amount of taxpayer money to funnel it to private investors so that those investors never have to worry about losing their money isn’t going to work, isn’t going to solve the underlying problems (such as the huge structural imbalances between EZ countries), and isn’t a solid basis on which to construct a new and improved financial system.

@ Bryan G

The treaty has been signed but it is not yet ratified. Within a few weeks of the signature, there was agreement to make certain additions. The major issue now is whether an element in the signed version, that in relation to PSI, which was forced through on German insistence, will be changed.

The ministers for finance are not involved in creating a new financial system. They are trying to stop a conflagration. I have no particular sympathy for bond investors but countries have a simple choice; if they do not wish to be beholden to them, they should not borrow excessively from them.

On the issue of the Community method, its use does not, obviously, arise in relation to the ESM which will be a separate treaty. But for all the other steps necessary, if the EU wishes to act quickly, it will have to have recourse to the Community method. As the latest news about a Schengen version of the SGP reveals, there is an enormous reluctance to do so in France and, to an extent that is not yet clear, in Germany.


I have no particular sympathy for bond investors but countries have a simple choice; if they do not wish to be beholden to them, they should not borrow excessively from them.

Wait, could someone fill me in on the point the Irish state decided to issue bonds for Anglo Irish Bank? I missed that bit.

I think it is hard for you to take part in a debate about the European component of the global financial crisis if you can not accept that investors of all kinds have to take responsibility for their bad investments. It is morally and practically insupportable, not to mention the fact that it eliminates the incentives to reform the financial system – which we all want, right?

@Shay Behorrah

… reform the financial system? Great idea …

… unenlightened investors can be mighty profitable. As Ferdinand Pecora, the Depression-era prosecutor, is supposed to have said of the events leading to the Wall Street crash of 1929: Pitch darkness was among the bankers’ stoutest allies.

MatrixsQuid rules OK, today, yesterday, 99% probability of tmoro … darn!

@Shay Begorrah
“Wait, could someone fill me in on the point the Irish state decided to issue bonds for Anglo Irish Bank? I missed that bit.”
Er, I presume you mean the Irish people? The Irish state certainly decided to do that – first the guarantee, then the repayments, then the ‘bailout’ that seems to be explicitly tied to repayment.

@hoganmayhew on how we all issued debt in Anglo Irish Bank, effectively.

Er, I presume you mean the Irish people? The Irish state certainly decided to do that – first the guarantee, then the repayments, then the ‘bailout’ that seems to be explicitly tied to repayment.

I think you can separate the legitimacy of the enforced ECB position on bondholders (and more generally on the privileged position of the utterly vital and yet terribly fragile Eurozone financial sector) from the hare brained decision of the initial Irish bank guarantee but that ground has been gone over a few too many times here. Either you see us as one of nexuses of a dysfunctional system or the cause of a problem in an otherwise functional system (along with the other Eurozone countries not sharing a border with Germany).

Which ever way you fall on that issue it seems difficult to argue that the position on the banks we ended up taking in Ireland (unlimited state liability) is in fact the ECB position and that it is a position we had no part in formulating.


It should be an interesting couple of weeks for the Irish government. With Merkel’s Stability Union proposals the EU/EMF could intervene directly in national budgets and impose tax increases. SInce the formal treaty change process appears to have been put to one side for now, Enda Kenny will come under pressure at the next Summit to agree to an intergovernmental agreement that would permanently enable such direct intervention in fiscal policy. Since this impacts the hallowed Corporation Tax, he won’t agree, hence yet another level of fragmentation with an EZ core being added to EZ and EU, with Ireland outside the core EZ. SInce this decision will be outside the Treaty process, there will be no referendum in Ireland (unless Kenny agrees to the proposals which is unlikely). The trigger point for when Ireland joins the “core EZ” will be when the current EU-IMF programme runs out, and when/if market access is still at very high interest rates.

These developments are going to challenge the main narrative that the Irish government presents – that Ireland will be a model pupil, take its punishment, and regain its “economic sovereignty” at the end its three-year period of detention. There will however be no return to the status quo ante, or no end to the “detention” period, since the Stability Union oversight is both permanent (for any country entering with a debt level of 120% GDP like Ireland) and more intrusive than the current EU-IMF programme conditionality. The German motto is “no liability without control”. For the Irish government trying to preserve the fiction of “sovereignty” is going to become more and more a futile task.

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