Spain
And Italy Are Toast Unless Germany Allows The ECB To Print Trillions
Of Euros
26
April, 2012
The
financial chess game in Europe is still being played out, but in the
end it is going to boil down to one very fundamental decision.
Is Germany going to allow the ECB to print up trillions of euros and
use those euros to buy up the sovereign debt of troubled eurozone
members such as Spain and Italy or not? Nothing short of this
is going to solve the problems in Europe. You can forget the
ESM and the EFSF. Anyone that thinks they are going to solve
the problems in Europe is someone that would also take a water pistol
to fight a raging wildfire. No, the only thing that is going to
keep Spain and Italy from collapsing under the weight of a mountain
of debt is a financial nuke. The ECB needs to have the power to
print up trillions of euros and use that money to buy up massive
amounts of sovereign debt in order to guarantee that Spain and Italy
will be able to borrow lots more money at very low interest rates.
In fact, this is probably what European Central Bank President Mario
Draghi has in mind when he says that he is going to "do whatever
it takes to preserve the euro". However, there is one
giant problem.
The ECB is not going to be able to do this unless Germany allows them to. And after enduring the horror of hyperinflation under the Weimar Republic, Germany is not too keen on introducing trillions upon trillions of new euros into the European economy. If Germany allows the ECB to go down this path, Germany will end up experiencing tremendous inflation and the only benefit for Germany will be that the eurozone was kept together. That doesn't sound like a very good deal for Germany.
The ECB is not going to be able to do this unless Germany allows them to. And after enduring the horror of hyperinflation under the Weimar Republic, Germany is not too keen on introducing trillions upon trillions of new euros into the European economy. If Germany allows the ECB to go down this path, Germany will end up experiencing tremendous inflation and the only benefit for Germany will be that the eurozone was kept together. That doesn't sound like a very good deal for Germany.
Right
now, the yield on 10 year Spanish bonds is
above 7 percent and
the yield on 10 year Italian bonds is
above 6 percent.
Those
are unsustainable levels.
The
only thing that is going to bring those bond yields down permanently
to where they need to be is unlimited ECB intervention.
But
that is not going to happen without German permission.
An
article in Der
Spiegel recently
described the slow motion bank run that is systematically ripping the
Spanish banking system to shreds....
Capital outflows from Spain more than quadrupled in May to €41.3 billion ($50.7 billion) compared with May 2011, according to figures released on Tuesday by the Spanish central bank.
In the first five months of 2012, a total of €163 billion left the country, the figures indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.
If
those numbers sound really bad to you, that is because
they are really
bad.
At
this point, authorities in Spain are starting to panic.
According to
Graham Summers,
Spain has imposed the following new capital restrictions during the
last month alone....
- A minimum fine of €10,000 for taxpayers who do not report their foreign accounts.
- Secondary fines of €5,000 for each additional account
- No cash transactions greater than €2,500
- Cash transaction restrictions apply to individuals and businesses
How
would you feel if the U.S. government permanently banned all cash
transactions greater than $2,500?
That
is how crazy things have already become in Spain.
We
should see the government of Spain formally ask for a bailout pretty
soon here.
Italy
should follow fairly quickly thereafter.
But
right now there is not enough money to completely bail either one of
them out.
In
the end, either the ECB is going to do it or it is not going to get
done.
A
moment of truth is rapidly approaching for Europe, and nobody is
quite sure what is going to happen next. According to the Wall
Street Journal,
the central banks of the world are on "red alert" at this
point....
Ben Bernanke and Mario Draghi, with words but not yet actions, demonstrated this week that they are on red alert about the global economy.
Expectations are now high that Mr. Bernanke's Federal Reserve and Mr. Draghi's European Central Bank will act soon to address those worries. But both face immense tactical and political challenges and neither has a handbook to follow.
So
what happens if Germany does not allow the ECB to print up trillions
of new euros?
Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture - with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits - would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008
Even
Germany is starting to feel the pain. This week we learned that
unemployment in Germany has risen for
four months in a row.
So
what comes next?
There
is actually a key date that is coming up in September. The
Federal Constitutional Court in Germany will rule on the legality of
German participation in the European Stability Mechanism on
September 12th.
If
it is ruled that Germany cannot participate in the European Stability
Mechanism then that is going to create all sorts of chaos. At
that point all future European bailouts would be called into question
and many would start counting down the days to the break up of the
entire eurozone.
If
Germany did end up leaving the eurozone, the transition would not be
as difficult as many may think.
For
example, most Americans may not realize this but Deutsche Marks are
currently accepted at many retail stores throughout Germany.
The following comes from a recent Wall
Street Journal article....
Shopping for pain reliever here on a recent sunny morning, Ulrike Berger giddily counted her coins and approached the pharmacy counter. She had just enough to make the purchase: 31.09 deutsche marks.
"They just feel nice to hold again," the 55-year-old preschool teacher marveled, cupping the grubby coins fished from the crevices of her castaway living room sofa. "And they're still worth something."
Behind the counter of Rolf-Dieter Schaetzle's pharmacy in this southern German village lay a tray full of deutsche mark notes and coins—a month's worth of sales.
I
have a feeling that it would be much easier for Germany to leave the
euro than it would be for most other eurozone members to.
The
months ahead are certainly going to be very interesting, that is for
sure.
Europe
is heading for a date with destiny, and what transpires in Europe is
going to shake the rest of the globe.
Sadly,
most Americans still aren't too concerned with what is going on in
Europe right now.
Well,
if you still don't think that the problems in Europe are going to
affect the United States, just check this news item from
the Guardian....
General Motors' profits fell 41% in the second quarter as troubles in Europe undercut strong sales in North America.
America's largest automaker made $1.5bn in the second quarter of 2012, compared with $2.5bn for the same period last year. Revenue fell to $37.6bn from $39.4bn in the second quarter of 2011. The results exceeded analysts' estimates, but further underlined Europe's drag on the US economy.
Profits
at General Motors are down 41 percent and Europe is being blamed.
The
global economy is more tightly integrated than ever before, and there
is no way that the financial system of Europe collapses without it
taking down the United States as well.
And
considering the fact that the U.S. economy has
already been steadily collapsing,
the last thing we need is for Europe to come along and take our legs
out from underneath us.
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