Germany vs ECB – Greece is caught in the middle. Will Greeks have to starve?

The ECB is currently influenced by German politicians (Bear with me, it takes a while for me to get to Greece).

Powers and objectives during the European banking crisis

The European Central Bank had stepped up the buying of member nations debt.^[19] In response to the crisis of 2010, some proposals have surfaced for a collective European bond issue that would allow the central bank to purchase a European version of U.S. Treasury Bills.^[20][21] To make European sovereign debt assets more similar to a U.S. Treasury, a collective guarantee of the member states’ solvency would be necessary.^[22] But the German government has resisted this proposal, and other analyses indicate that “the sickness of the Euro” is due to the linkage between sovereign debt and failing national banking systems. If the European central bank were to deal directly with failing banking systems sovereign debt would not look as leveraged relative to national income in the financially weaker member states.^[21]

The ECB and France want the ECB to be less focussed on inflation and more focussed on “job creation and growth” ( let us ignore the fact that the ECB has no ability to create jobs or real growth for a moment). Germany on the other hand wants the ECB to focus on keeping inflation down.

The bank’s independence has notably come under intense criticism since the election of Nicolas Sarkozy as French President. Sarkozy has sought to make the ECB more susceptible to political influence, to extend its mandate to focus on growth and job creation (at cost of inflation), and has frequently criticized the bank’s policies on interest rates.^[31] As result of pressure from France and Greece, independence of ECB has been limited.^[31]

Why does Germany care more about inflation than France?

Germany has much more assets than France. Germany has a lot more to lose if the Euro were to devalue. France would gain by a devaluation in the Euro as the value of its debt would decrease.

Here are some figures.

Looking at savings alone you can see that Germans have twice as much to lose as the French if the Euro was devalued.

German Gross Savings 2010 758 billion USD

France Gross Savings 2010 45o billion USD

Looking at NET foreign financial assets vs liabilities. If the Euro were to devalue, Germany would get less money back on credit denominated in Euro whereas France would have to pay less on debt denominated in Euro.

The rest of the world owes Germany around 800 billion Euros

France owes the rest of the world 208 billion Euros

Looking at balance of trade, Germany is more than capable of servicing its debts as it has a trade surplus of around 10 billion Euros a month, France on the other hand sends around 5 billion Euros a month out of the country. In short France is much more vulnerable to borrowing costs than Germany.

In short, Germany is in a much healthier financial position than France. Germany has nearly a trillion Euros more assets than France.  Germany does not want to see the value of its investments get inflated away, France would like to see its debts get inflated away.

With regards to the banks being in a worse financial state than Germany

Evidence & comment on the insolvency of European banks

International Financial Review

“European banks have spent far too long saying everything is fine, when it really isn’t,” said one banker at a US bank who has been advising European clients on their options. “They are slowly realising that they just won’t be able to do what the market is expecting. We are edging slowly closer to the depths of the crisis.”

Bloomberg/Pragmatic Capitalism

Michael Platt, founder of the $30 billion hedge fund BlueCrest Capital, spoke to Bloomberg Television’s Erik Schatzker and Stephanie Ruhle in his first-ever live TV interview.

Platt said that most of the banks in Europe are insolvent and the situation in the region is “completely unstable.”  On investing in illiquid assets, Platt said he “would not touch them with a barge pole” and that “the major opportunities will come post-blowout.”

Daily Telegraph

Tyllic

It is one thing for bank’s to be a ‘black box’ when they have few non-performing or toxic assets.  It is entirely another issue when banks clearly have so many non-performing or toxic assets that their solvency is highly questionable.

Zerohedge

As if insolvent European private banks were not enough to worry about (and with banking assets of 461 percent of GDP in the UK, 178 percent in Germany, and 820 percent in Switzerland, there is more than enough to worry about), a new study by Open Europe has found that at the heart of the insolvency argument is none other than the only hedge fund that is even worse capitalized than the US Federal Reserve: the European Central Bank.

Zerohedge (another article from many)

At these levels, and using the currently proposed Greek 50% haircuts as a model for future defaults in the EU, Deutsche Bank could very easily see 10-15 billion in write-downs from its PIIGS’ exposure.  This would wipe out 16%-25% of the bank’s entire equity and render it borderline insolvent.

And we’re talking about one of the biggest, most “solvent” banks in Germany here.

Make no mistake, the situation in Europe is far far worse than 99% of investors realize. Even if the second Greek Bailout is finalized (the details are still emerging) we’ve still got Italy and Spain to deal with: two problems that are far too big for any of the current troika (ECB, IMF, and EU) to handle.

OpenEurope

However, by rushing to the aid of ailing banks, the ECB has also shifted risks amounting to hundreds of
billions from individual banks to its own books – with the taxpayer as the ultimate guarantor. Many of
these banks are not viable absent this funding and the ongoing support creates a number of economic
costs

Reuters

The third point is that we do not need stress tests to understand that many of the banks of the EU are insolvent. An inspection of the data published by the International Monetary Fund suggests that many of the banking markets in the EU are badly decapitalized. Even Deutsche Bank, arguably the most important bank in Western Europe, has just €50 billion in capital supporting €1.7 trillion in total assets. Only by ignoring the sovereign and off-balance sheet footings of Deutsche and other major EU banks can anyone even for a moment pretend that these banks are solvent.

So on the one hand you have France and the banks with huge unmanageable debts and on the other hand you have Germany which is in a sustainable position financially.

So how does Greece fit in to the picture and why is Greece caught in the middle?

The answer to the Greek government debt crisis according to France and the banks is liquidity, ie printing money and inflation to devalue debt.

The problem they have is the Germany does not want to see devaluation and is resisting the printing of money.

You will have noticed in the mainstream media that Germany is constantly vilified as the bad guy in the whole Greek debt crisis. Germany demands this, Germany demands that etc etc.

So what tools do the ECB, France and the private banks have to coerce Germany?

Greece.

Germany is insisting that strict conditions be applied to the loans to the Greek government. Germany wants to see the Greek government being run sustainably.

Germany, understandably in my mind, does not want to throw good money after bad.

So how is Greece being used as a toll to coerce Germany?

The deliberate mismanagement of the Greek austerity measures. Greek politicians, whether they are aware of the situation or not, are working with the ECB, France and international banks by sabotaging the reorganisation of the Greek economy.

Greek politicians whether they realise or not are sabotaging their own efforts to make the Greek government sustainable.

Why would the ECB, France and the private banks want to see Greek politicians destroying their own economy?

To Germany look bad.

The Greek government is implementing self-destructive austerity measures and is blaming Germany for the results.

The Troika are more or less saying the right things. ie liberalisation of protected professions, shrink government, reduce regulation, make it easier to do business, improve the efficiency of the legal system and so on.

I think everyone can agree that this is good formula for improving an economy.

The problem is that Greek politicians, whether they appreciate it or not are undermining the good things by imposing massive tax increases.

In all honesty, taking into consideration the amount of money the Greek government has been given, the ideas put forward by the Troika would have ended the Greek recession a year ago and the Greek economy would be growing again, all other things being equal.

But the Greek government sabotaged the good measures by imposing crippling taxes which has destroyed the Greek economy with all the blame being put on Germany.

What is the purpose of Germany being made to look bad?

The banks, ECB and France want to force Germany to come over to their side of the argument. The ECB, France and the banks want to force Germany to abandon its ani-inflation policy and adopt an inflationary policy for all the reasons I have highlighted above.

So the ECB, France and the banks want to put political pressure on Germany by alienating public opinion against German policies.

The job has been done in Greece. People are more than willing to blame Germany for all the problems.

And I think the tide of public opinion is slowly starting to turn in other European countries.

The question is, how far do the banks, the ECB and France have to go to force Germany to start printing money?

What will it take?

Will it have to go as far as Greeks dying of starvation for Germany to fold in the face of public condemnation and finally give the okay for the printing of money and the creation of inflation?

All the evidence is that the Greek political  establishment is on the side of inflation, so what can Germany do to stop the inevitable vilification that will be coming its way if the Greek government continues to destroy the Greek economy?

The obvious answer is to let the country default and recapitalize the private savers in Greece after the default.

The problem Germany has it the same people who are controlling the currency now will still be in power post default.

Even if Greece does default, it is still very likely that the politicians in Greece will continue to destroy the economy with Germany still getting the blame, even if Greece left the Euro.

I can imagine the headlines “Look at what Germany has done to Greece” with a photo of decimated crops below.

Germany could exit the Euro itself but there would still be the PR problem. But at least if Germany did leave the Euro the remaining countries would be free to let the ECB create the inflation they want.

A German exit from the Euro could solve a lot of the problems France and the banks are facing.

The final option is that Germany could simply fold before the Greek debt crisis turns into a humanitarian crisis, Germany could save face but lose the value of their assets. Which is worth more the Germany?

To save face or to save money?

It is easy to say, Germany should abandon its “principles” and just print the cash, I mean what is the big deal with inflation?

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But think about it for one moment. Which sort of economy would you prefer to live in?

An economy where debt is inflated away and the quality of life and savings is constantly destroyed by the printing of paper money?

Or would you prefer to live in an economy where the money in your pocket keeps it value, or even increases, meaning your savings increase in value and your spending power increases.

At the moment Greece is caught in the middle. It cannot print its way out of trouble and the Greek politicians are not laying the groundwork for a stable currency. The country is in purgatory for the sake of a PR stunt against German economic policy.

So the big question is, how is the Greek crisis going to end?

1. Will Germany fold and create inflation in the face of Greeks starving?

2. Will Germany leave the Euro to let the Euro be inflated?

3. Will Germany let Greece default and pick up the pieces after? (But the image of Germany has already be so poisoned, it is questionable if Greek would even accept German help post default)

4. Or will Germany cave before the PR disaster gets too bad?

As things stand today, option 1 is the most likely destination, I hope I am wrong and things do not go this far.

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