I am posting today’s story on the Santelli Exchange I taped today. Rick and I were back on the most important topic facing the world: THE ECB’s ROLE IN CREATING A SITUATION THAT MAKES GERMANY LIABLE FOR THE DEBT OF THE ENTIRE EUROPEAN UNION. The world is still abuzz about the BREXIT referendum and its implications for the U.K.. There’s also chatter about what it might mean for other EU nations contemplating STAYING OR GOING in terms of subjecting their citizens to the capriciousness of Eurocratic regulation. The question for me (and will continue to be): WHO GUARANTEES THE ECB, AND, OF COURSE, THE COROLLARY QUESTION, SHOULD ALL SOVEREIGN DEBT BE A ZERO WEIGHTED RISK ASSET CLASS?
As I discussed this topic with Rick, I mentioned I had the opportunity to ask FED GOVERNOR Jerome Powell this question at the Chicago Council on Global Affairs meeting of June 28. The FOMC Governor failed to answer my question about the zero risk weighting of all sovereign debt and his perfunctory answer as to who guarantees the ECB, he said THEY HAVE A PRINTING PRESS. It is patently WRONG to compare the Fed’s ability to print money with the ECB‘s hoped for ability to provide ink and paper for paper money. The FED has the full support of the U.S. Treasury’s taxing authority standing behind its QE programs but the ECB has no such fiscal authority as its guarantor. It is the market’s acceptance of the full faith support of Germany that is responsible for the success of Draghi’s “whatever it takes” program. If the Germans were to demand a vote on EUROPE the shock waves would render the BREXIT aftereffects a small wave relative to a German promoted tsunami.
(Click on the image to watch me and Rick discuss Brexit’s implications on the ECB and eurozone.)
President Draghi is in a hurry to accumulate more and more debt so as to make any German NEIN a systemic event. If the ECB balance sheet is loaded with the sovereign debt of Spain, Italy, Portugal and others then a German effort to reduce its liability would cause a collapse of the entire European financial system. Remember, the Italian, Spanish, French, Dutch, German and other domestic bank balance sheets are loaded with domestically issued sovereign debt and they currently are NOT REQUIRED to account for any reserves against these assets. If you believe Italian banks are under severe stress now contemplate their capital needs if the BIS were to adjust the Basel rules and render not all sovereign debt a risk-free asset for banks. If you want to feel the effects of a negative feedback loop let the BIS become a more objective rules maker. Again, Mario Draghi is adhering to rule number one of finance: If you owe the bank 10 billion it is your problem, but if you owe the bank a TRILLION it is their problem. The BRITS removed themselves from direct responsibility of the ECB debt issue. Maybe they weren’t no-nothings after all.
Also, it’s interesting that Chancellor of the Exchequer George Osborne threatened British taxpayers with a tax increase if Britain left the EU. Yesterday, the same George Osborne suggested cutting U.K. corporate taxes in an effort to entice business to remain or immigrate to London and beyond. The POUND has dropped 10% versus the euro, which will aid in the correction of the U.K.’s steep current account deficit as British imports become more expensive and exports cheaper. Greece, Spain and Italy can only dream of such flexibility as the only alternative for EURO currency members is a bout of internal devaluation to correct budget and current account imbalances. The need for internal devaluation is responsible for the depression level unemployment numbers in Spain, Italy and Greece.
Further, this weekend brought news that Paris and Berlin were pressuring the European Commission and President Juncker to halt proceedings on a free trade agreement with Canada. One of the arguments of the British “Remain” camp was that British trade would be adversely effected by LEAVING but it seems that Britain will be able to negotiate faster with other nations by not being in the EU group of 27. The U.S./European TTIP agreement won’t be approved for at least two years in which it will happen that the U.K. actually moves to the front of the queue. Again, to get a qualitative perspective on the morass of Europe, read the “ROTTEN HEART OF EUROPE” (can’t tell the players without a program). And Europe will be the epicenter of the financial crisis as we head into the second half of the year.
Tags: Brexit, British pound, ECB, EU, Euro, Fed, FOMC, Germany, Jean-Claude Juncker, Mario Draghi
July 5, 2016 at 7:25 pm |
Yra, I am reading the Rotten Heart of Europe! It is like another version of our current stories played out in 1987 and 1992.
Thanks for the timely suggestion.
Marta
July 5, 2016 at 8:40 pm |
Marta–thanks for the kind words.An amazing statistic is that 70% of the books buyers have been women–doesn’t really amaze me for I know who works harder—
July 6, 2016 at 1:53 pm
Europe has never been friendly to free speech. In 2001, the European Court of Justice ruled that the European Union can suppress criticism of its institutions and its leaders. Back then, the Court had the British economist Bernard Connolly in its sights, whose book The Rotten Heart of Europe it found “aggressive, derogatory, and insulting” and “akin to extreme blasphemy.”
July 5, 2016 at 7:59 pm |
Here is the Sonny locking the door. “Now youse can’t leave.”
https://www.youtube.com/watch?v=H_lijLYuw-o
I am not so sure the Germans can ever leave the Euro and go back to the Deutschemark without serious blowback consequences.
If Germany even discussed leaving the Euro there would be serious repurcussions to DeutscheBank (DB) because of their huge derivative positions. According to the IMF DB is the “Most Systemically Important Bank” in the world.
http://www.investopedia.com/articles/investing/063016/deutsche-bank-most-systemically-important-dbk.asp
DB has over $2 trillion in balance sheet assets and untold amounts of derivatives. The derivative risk of the euro currency and bonds would create a counterparty risk much greater than Lehman and AIG.
I follow DB’s stock closely as a market bellwether. It continues to hit new lows. Today it has a mark cap of just $18 Billion.
DB is still above water only because Draghi/ECB bought up all the bad european paper – much of which DB owned and or traded.
While the PIGS certainly have benefited from the ECB purchases DB has also benefited. As DB benefits so do the repressed German depositors. If DB went down Germany would go into a depression and take the rest of Europe along. The German savers are better off with negative rates than a major haircut on their account values.
I think the doors are locked for all of the European banks.
The ECB needs to bailout the Italians but they also need to plug that big capital hole at DB. So what’s good for the Italians, Spain, and Portugal can also be good for Germans. The ECB needs to keep that giant printing press running at full speed and overtime.
July 5, 2016 at 8:44 pm |
Asherz–as always a splendid addition to the blog–thanks.
July 5, 2016 at 8:49 pm |
Frank–had just been rewatching it as you posted.Thanks for your insights and much more will follow.As I have discussed since December it is now entering the political which is why the “wall street” analysts are missing 3/4 of the story —-the world is a 2+2=5 answer if you are willing to look beyond the known.The German political fabric is tearing and again the Brits were smart for removing themselves before the quicksand of debt enveloped them .So smug are the voices of static thinking and those who provide the echoes of their minds—-
July 5, 2016 at 8:08 pm |
As to Germany being counted on to bail out the EU basket cases, let’s take a look at Deutsche Bank. DB is down 90% from its all time high and is leveraged 40-1. Their market cap is $20 billion and has $72 trillion, (with a T) in derivatives. That problem alone should make Jens Weidmann squirm. Mr. Draghi is looking south to Italy which is making the headlines, while the big explosion may come from his own neighborhood in Frankfurt.
The brush fires are proliferating and starting to rage (let’s not forget the sick giant in the far east) and the firehoses are puny relative to the flames surrounding the firefighters who caused the problems to begin with.
Yra, Jerome Powell could not answer your zero risk weighting question for obvious reasons. It would expose the make believe world the bankers are asking everyone to believe in as nothing more than a rabbit hole.
Precious metals are not moving up with some momentum for no reason.
July 5, 2016 at 8:11 pm |
Sorry I just saw Frank C. comments or I wouldn’t’ have posted mine.
July 5, 2016 at 9:42 pm |
Mike Oliver/Momentum Structural Analysis: A brilliant takedown and itemization of the fundamentals inside European statism – I can only calculate and measure momentum metrics but they say Yra has defined the factors in play to perfection. We are nearing what some folks might call “the end of days.” I frankly look forward to them. Sometimes fractal process is most beneficial. Thanks Yra!.
July 6, 2016 at 2:56 am |
Could Germans vote to exit the EU? Dexit?
http://www.dw.com/en/could-germans-vote-to-exit-the-eu/a-19365390
July 6, 2016 at 5:10 am |
Well, I think the right answer is the ECB has a printing press.
1) if it has a liability in euros, it can create the euros to pay that off, without drawing on any national fisc.
2) if it has a liability in another currency, it can print enough euros to buy the requisite amount of said other currency.
The major central banks don’t have many liabilities. For some reason “cash in circulation” is recorded as a liability on those b/s. But that’s probably a relic from days when central bank notes were redeemable in gold. With fiat money, cash is not a liability. It really should be a footnote to the balance sheet.
July 6, 2016 at 10:46 am |
Mark T–I agree with that in principle but for the FED and others it is the power of the fiscal authority that provides the backdrop to the printing presses—-I search for a similar fiscal authority which I raise the corollary of the risk weightings of all sovereign debt—otherwise Draghi should just print away and create a high level of inflation and debase the creditors and remove the ECB’s potential liability—-see history for possible outcomes
July 6, 2016 at 5:31 am |
guys, relax. Germans are big EU fans. exports make up half of our economy, 1.000 billion into the EU. we won´t destroy ourselves by breaking up the European Union. Arthur´s linked article sums it up: “An overwhelming majority of 79 percent would have voted against leaving the EU, the Forsa pollsters found. Only 17 percent would have voted for an exit – and of the latter, 60 percent were AfD supporters.”.
July 6, 2016 at 10:48 am |
Breen AB–you are our boots on the ground–but as you have noted before the German middle-class is concerned and there has been “real” demonstrations against TTIP —the repression of savers is a real outcome of the flaws in the EU
July 8, 2016 at 8:23 am
in a new poll released today support for the EU ist up by 13 percentage points compare to pre Brexit. only 11% now believe that the EU is bad for the country. 79% of Germans also understand that our economy profits massively form the EU.
you´re correct Yra. there´s resentment towards TTIP. but not because of the EU. but people fear to fall victim to lower US standards (like gen food) oder to US multinationals suing entire countries in those obscure private courts.
as much as it is a hot topic among us – the ECB is still not on the agenda in German politics. here and there there´s a sentence dropped in political talk shows. but there´s no movement, no outrage, whatsoever.
July 6, 2016 at 9:04 am |
“a German effort to reduce its liability would cause a collapse of the entire European financial system. ”
Perhaps the debt market has become saturated.. Maybe I’ve seen this movie before, this isn’t a sequel is it?
July 6, 2016 at 9:10 am |
The EU is the 5th Reich, run by ethnic Germans (a certain sub-tribe of Germans). The Germans won’t kill it, but they may reform it so that the EU Euro internal obligations are the new Lira/Drachma (feces-currency, backed by the industry of corrupt low-productivity people with no gold) while Germany issues Gold & Industrial-backed New DM’s.
July 6, 2016 at 11:40 am |
So, if Germany would not leave the EU, does Germany simply reason it through to become the Fiscal Proprietor of the EU, creating 26 (is that right) serfdoms?
The problem there is they take on the responsibilities for the “irresponsibles”.
There has to be a play where Germany, being fiscally OK can take advantage of those who aren’t and further gain.
What a basket case! Just thinking amorally.
July 6, 2016 at 11:43 am |
The Gauntlet has been thrown: “A Furious Italian Prime Minister Slams Deutsche Bank As Europe’s Most Insolvent Bank”
(See http://www.zerohedge.com/news/2016-07-06/furious-italian-prime-minister-slams-deutsche-bank-europes-most-insolvent-bank)
If you think a currency war is bad, welcome to H.G. Wells “War of the WORDS”, a perfect companion for 2+2 = 5
July 7, 2016 at 12:59 pm |
This month insolvent, next month illiquid then month after that?
July 6, 2016 at 11:49 am |
Sorry, “War of the Worlds”