Return of the Deutsche Mark?

[Jan Klimkowski]

There are persistent rumours that Germany is about to abandon the Euro and reinstate the Deutsche Mark.

It could be tinfoil. However:

Nicolas Sarkozy threatened to pull out of euro over Greece row

French president Nicolas Sarkozy warned of damage to Franco-German relationship if Angela Merkel opposed EU plan

Nicolas Sarkozy threatened to abandon the euro unless Angela Merkel dropped her hostility to the EU's €750bn safety net for the single currency, sources in Brussels and European capitals said yesterday.

In a confrontation between Europe's two most powerful politicians, the French president said he would walk out of the talks and warned of lasting damage to the Franco-German relationship unless the German chancellor backed the plans.

"It was a standup argument. He was shouting and bawling," said one official in Brussels. "It was Sarkozy on steroids," said a European diplomat. "He's always very energetic. This time he was very emotional, too." The French leader banged his fist on the table, according to yesterday's El País newspaper in Spain.

The showdown, late on Friday last week, kicked off a momentous week in Europe, raising fears – shared strongly in Washington and elsewhere – that the euro could collapse, wreaking untold damage on the world economy and also raising questions about the very future of the EU.

Merkel warned on Thursday that the single currency crisis triggered by Greece's debt debacle was about much more than money. "If the euro fails, it is not only the currency that fails. Much more fails," she said. "Then Europe fails. The idea of European unity fails."

Sarkozy's ultimatum came at a Brussels summit of leaders of the 16 countries in the single currency. It was called to rubber-stamp a €110bn rescue package for Greece, but was overtaken by events.

The financial markets were targeting Spain and Portugal and the Greek emergency had escalated into a full-blown euro crisis. After months of handwringing, the leaders had to come up with a much bigger deal to underpin the euro. By 11.30 pm, several sources said, the summit was deadlocked, with Merkel digging in against a rescue fund to which Germany would need to contribute at least €120bn.

Diplomats at the time reported that the summit was going very badly and would continue through the night.

But it ended half an hour later after Sarkozy abruptly announced he was leaving. "Sarko said: 'For me it's over. I'm stopping this if we can't agree,' " said a diplomat.

Sarkozy came downstairs and staged a triumphalist press conference, announcing a radical breakthrough, an agreement that was "95% French".

http://www.guardian.co.uk/world/2010/may...ela-merkel

If the Germans think the French could pull out of the Euro, it is in Germany's national financial interest to pull out first.

It's the pass the parcel game, and noone wants to be left holding the toxic package.

[Jan Klimkowski]

Here's Market Ticker's Karl Denninger's take on last week's Euro "bailout":

Analysis: Equity Markets Dangerously Misreading ECB

To follow up and expand upon my other writings regarding the ECB/Euro bailout package of last weekend, I want to focus on why I believe the markets responded to the north as strongly as they did - and why believing in this may be dangerous to your portfolio.

Markets try to suss out the impact of events based on history. The more recent the history the more impact that event has in the collective consciousness. This is true in all human endeavors where psychology is a factor, and the equity markets are the epitome of human psychology interacting with money.

About 18 months ago the United States Congress passed TARP, and The Fed opened unprecedented policy actions (many of which I have argued were illegal, and still do.) But the markets, at least initially, did not respond. Indeed, it was not until about six months later, when FASB changed mark-to-market accounting rules and thus allowed financial institutions to lie about balance sheet values in the United States, that the "recovery" of the markets really took hold.

The pundits, however, all point to "easy money" and "monetization" (whether true or not) as the reason for the market turn. I disagree, and point to the fact that both consumer and business credit have not turned around. We can therefore disregard that claim as mathematically deficient (incidentally it was correct in 2003, as the numbers show.) It didn't work this time because the market is (still) debt-saturated, which is why we entered the recession and housing crash in the first place.

I have spent many hundreds of hours studying the credit crunch and the alleged "recovery" therefrom thus far, which has led me to my primary thesis for the stock market rally and alleged "stabilization" in the US Economy. The truth is found right here in my favorite (of late) chart:

(chart at url)

That is, we didn't "recover" in the stock market because of a "bottoming" in the economy nor, in the main, because of ZIRP. We can exclude the zero-rate policy as a recovery catalyst as it didn't work in Japan, which tried the same thing and got two decades of deflation and a stock market stuck at 2/3rds off all-time highs in response.

So what "moved the needle", at least temporarily?

Two things:

Blowing budget deficits wide. Japan had them before, thus their budgetary profile just continued to deteriorate - they lacked the ability to make meaningful additions to that program and move the needle. We could, we did, and it mattered - for now.


FASB changes. They were a game-changer in the short term, but are ruinously bad in the intermediate and longer term. The game has been and continues to be to allow banks to claim valuations that don't exist in the hope that (1) they can "earn" enough to close the gap or (2) asset values will recover. The latter is an idiotic premise as the values were never real in the first place and the former won't work because instead of rebuilding cash reserves with these "earnings" the banks have instead bonused out all the money! But in the short term it all looks good, and most of these stocks have doubled - or more.
That's where your rally came from and it's also where your positive GDP prints have come from in the US. My belief that the government couldn't get away with (1) for more than 12 months or so, by the way, is why my original belief that this move upward wouldn't have the power or duration it has proved incorrect. Sadly, it also means that when the pump wears off the collapse will be significantly worse than if they had left it alone - they've blown the money but the debt is still there.

By the way, for those who argue differently - show me the math. Specifically, show me how blowing a budget deficit from 3.5% of GDP to 11% of GDP does anything other than what's happened, and how allowing firms like Wells Fargo to maintain $1.7 trillion off balance sheet without a market price for those "assets" fails to cause people to "believe" that the firm is solid and stable, and thus be willing to buy their stock (along with the rest of the financial sector.) I'll take that analysis on the latter point in the form of actual valuations of those assets against the market and compare the divergence against these firm's Tier 1 Common Equity (and I'll wager all will print a number in parenthesis if you do that.)

Now let's analyze against the European/ECB announcement.

First, the ECB announcement is the exact opposite of point #1 above. That is, the announcement contains formal claims of austerity for governments, which means reducing the debt-issuance spike to GDP. Whether through tax increases, spending cuts or both, the impact will be the same, and it will be materially negative on a macro economic level. There is no possible way to avoid this if the actual austerity measures are taken, and yet the "bailouts" are conditioned on them so it is reasonable to assume that either (1) they won't be taken and the bailouts won't happen or (2) they will be taken and the effects will flow from them.

Second, European banks were already lying about asset valuations. That is, there's no "goose" that can come from that here in this case, as Euroland banks were never honest about their leverage or asset valuation levels to the degree that US banks used to be. Thus, there's nothing to "rig the market with" there, as the impact of that rigging has already been had years ago.

The FX markets have already figured this out and reacted accordingly; indeed, the Euro traders figured it out in less than 12 hours. But the bond and equity markets haven't - yet.

Putting off the collapse of a sovereign bond market by buying their bonds when you are sterilizing the buying doesn't work for long. The credit markets will call that bluff sooner rather than later, and when they do spreads will start to force open again.

At that point the ECB has a problem: If they try to increase the size of the package they will have to deal with those who claim there's a credibility problem in that they haven't yet funded the original program (and might not be able to!); if they instead turn to raw monetization of debt the entire underpinning of the Euro and ECB goes down the drain and the risk of defections grow substantially. Indeed, there may already be some hints of that with Germany - if the German people haven't figured out that this program, led to its conclusion, inexorably requires them to transfer their wealth to the PIIGS simply to keep the Ponziconomy in Europe going, they soon will.

In short this doesn't look like a stability measure to me, it looks like an instability measure. There's nothing worse than "reassuring" the market with something that turns out to be BS, as we saw back in 2008 with Fannie, Freddie, and Bear.

I think we're due for another example, and would be protecting all long-side positions accordingly.

Thursday last may have been nothing more than the Fat Lady clearing her pipes.

http://market-ticker.org/archives/2314-A...g-ECB.html

[David Guyatt]

There are persistent rumours that Germany is about to abandon the Euro and reinstate the Deutsche Mark.

It could be tinfoil. However:

Nicolas Sarkozy threatened to pull out of euro over Greece row

French president Nicolas Sarkozy warned of damage to Franco-German relationship if Angela Merkel opposed EU plan

Nicolas Sarkozy threatened to abandon the euro unless Angela Merkel dropped her hostility to the EU's €750bn safety net for the single currency, sources in Brussels and European capitals said yesterday.

In a confrontation between Europe's two most powerful politicians, the French president said he would walk out of the talks and warned of lasting damage to the Franco-German relationship unless the German chancellor backed the plans.

"It was a standup argument. He was shouting and bawling," said one official in Brussels. "It was Sarkozy on steroids," said a European diplomat. "He's always very energetic. This time he was very emotional, too." The French leader banged his fist on the table, according to yesterday's El País newspaper in Spain.

The showdown, late on Friday last week, kicked off a momentous week in Europe, raising fears – shared strongly in Washington and elsewhere – that the euro could collapse, wreaking untold damage on the world economy and also raising questions about the very future of the EU.

Merkel warned on Thursday that the single currency crisis triggered by Greece's debt debacle was about much more than money. "If the euro fails, it is not only the currency that fails. Much more fails," she said. "Then Europe fails. The idea of European unity fails."

Sarkozy's ultimatum came at a Brussels summit of leaders of the 16 countries in the single currency. It was called to rubber-stamp a €110bn rescue package for Greece, but was overtaken by events.

The financial markets were targeting Spain and Portugal and the Greek emergency had escalated into a full-blown euro crisis. After months of handwringing, the leaders had to come up with a much bigger deal to underpin the euro. By 11.30 pm, several sources said, the summit was deadlocked, with Merkel digging in against a rescue fund to which Germany would need to contribute at least €120bn.

Diplomats at the time reported that the summit was going very badly and would continue through the night.

But it ended half an hour later after Sarkozy abruptly announced he was leaving. "Sarko said: 'For me it's over. I'm stopping this if we can't agree,' " said a diplomat.

Sarkozy came downstairs and staged a triumphalist press conference, announcing a radical breakthrough, an agreement that was "95% French".

http://www.guardian.co.uk/world/2010/may...ela-merkel

If the Germans think the French could pull out of the Euro, it is in Germany's national financial interest to pull out first.

It's the pass the parcel game, and noone wants to be left holding the toxic package.

Call me cynical, but I keep thinking of the designer collapsing of the Tiger economies back in 1998 by the Hedge funds. And I then wonder if the Euro has gone the same way by being fed IED assets that sat quietly in the dust waiting for the day they could "command" explode.

In this scenario the winner is, again, the Dollar that remains the major world currency unthreatened by an emerging "other" world currency?