Josh Rosner of Graham Fisher published a report last week urging subscribers to short bunds, beating the Moody’s negative watch for Germany and the Netherlands by a full week.
The article provides a data-rich analysis of how a banking crisis has morphed into a sovereign debt crisis as the authorities have refused to impose losses on investors in banks in the so-called core Eurozone countries. And as Rosner argues, the current path of denial and delay has increased the eventual costs to Germany and the global economy, with the tab to Germany already €500 billion higher than it would otherwise have been. The executive summary:
As the global financial and economic crisis drags on European regulators and policy-makers are continuing in their attempts to find a path from crisis toward stability, while balancing the public interests of independent sovereign nations desirous of a deeper financial, economic, political and fiscal union. Concurrent with these attempts, the media and government officials in the core of Europe are characterizing the crisis as one stemming from profligate borrowing and reckless spending by peripheral Eurozone economies.
Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labor market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy.
While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at:
• Designers of the European Monetary Union who, at the creation of the EMU, ignored regular and repeated warnings, from noted academics, analysts and policy advisors, that structural weaknesses would lead us to the crisis we now face;
• Banks, in the core, with weak internal controls and excessive leverage, which were profligate lenders in search of yield, to weak private, corporate and sovereign creditors in the peripheral countries;
• Those officials and technocrats who failed to properly regulate the domestic banking industry and allowed bankers to treat all sovereign debt as equal regardless of the differing debt capacity of the issuer;
• Rating agencies that failed to offer meaningful analysis of sovereign credit capacities and also assumed that too-big-to-fail financial institutions ratings should reflect an implied or explicit guarantee by their home country;
• Political leaders who, since the beginning of the crisis, downplayed its ultimate costs and, thus, delayed its resolution and increased the ultimate costs to taxpayers;
With this as a backdrop, it logically follows that the German government and central bank are seeking to protect the markets for German exporters and the German banking sector. Accordingly, the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalizing German banks and financial support for German industry Either approach will lead to German debts rising markedly while its economy contracts. The costs will be astounding.
The longer it takes for political leaders to offer their constituents full disclosure and transparency, the more costly any solution will be. For this reason, Eurozone political leaders must act decisively.
This paper will not suggest a particular path. Rather, this paper will show the constraints on choosing a path forward are the results of a lack of political will, not economic ability. The lack of will is a failure of politicians to lead and of technocrats reticent to deliver unwelcome, but necessary news to the German people.
In Germany, where real wage declines early last decade robbed households of consumption and represented a transfer of income to domestic exporters and banks, the news that taxpayers will now be responsible for bailing out these firms, while accepting reductions in national sovereignty will be a particularly bitter pill to swallow.
In several Eurozone countries rising nationalistic sentiment threatens to derail the Euro project. A disorderly collapse will result in an outcome far more costly to core countries than fully recognizing losses, recapitalizing financial institutions and integrating Eurozone economies. This paper will explore:
• Why, in the wake of unification of East and West Germany, Germany was uniquely poised to benefit from a monetary union;
• The role that Germany and its banking sector played in setting the stage for a crisis in the periphery;
• Germany’s current economic and fiscal condition and existing commitments to the periphery;
• The possible German debt to GDP implications of various crisis management approaches;
• The likelihood German bond yields will no longer remain detached from fundamentals; and
• A fair basis on which to consider German obligations to the periphery.
The longer leaders wait and the less decisive their approach, the greater the risk that German bunds and German banks will lose their status as the “safe haven” assets of Europe. These risks are already on the rise as witnessed by recent the deterioration of global investor appetite for German government and bank securities.
This is the money paragraph:
I encourage you to read the article in full: