The implosion of the Eurozone appears to be accelerating. But Germany? Come on! Yet Ambrose Evans-Pritchard writes the crisis in the eurozone periphery is moving to the core as credit default swaps for German, French,and Dutch bonds have blown out in recent days. In his Telegraph article, EU rescue costs start to threaten Germany itself, Evans-Pritchard writes,
“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”
The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.
While Germany’s public and private debt is not extreme, it is very high for a country on the cusp of an acute ageing crisis. Adjusted for demographics, Germany is already one of the most indebted nations in the world.
Reports that EU officials are hatching plans to double the size of EU’s €440bn (£373bn) rescue mechanism have inevitably caused outrage in Germany. Brussels has denied the claims, but the story has refused to die precisely because markets know the European Financial Stability Facility (EFSF) cannot cope with the all too possible event of a triple bail-out for Ireland, Portugal and Spain.
There is creeping doubt about Germany’s commitment if new funds are required,
Whether governments will, in fact, write a fresh cheque is open to question. Chancellor Angela Merkel would risk popular fury if she had to raise fresh funds for eurozone debtors at a time of welfare cuts in Germany. She faces a string of regional elections where her Christian Democrats are struggling…
The great question is at what point Germany concludes that it cannot bear the mounting burden any longer. “I am worried that Germany’s authorities are slowly losing sight of the European common good,” said Jean-Claude Juncker, chair of Eurogroup finance ministers.
Europe’s fate may be decided soon by the German constitutional court as it rules on a clutch of cases challenging the legality of the Greek bail-out, the EFSF machinery, and ECB bond purchases.
The article concludes with concern over German legal support for the bailouts,
“There has been a clear violation of the law and no judge can ignore that,” said Prof Hankel, a co-author of one of the complaints. “I am convinced the court will forbid future payments.”
If he is right – we may learn in February – the EU debt crisis will take a dramatic new turn.
Wow! Even if the article is discounted for Ambrose-Pritchard’s perma-bearishness and sometimes borderline alarmism, the issues he raises must be considered in assessing market risk, and are certainly not priced, in our opinion. Meanwhile, Larry Fink, founder of Blackrock, says the Euro is going to $1.20. Why would it stop at $1.20, we ask? Buckle up!