Monday, 30 July 2012 07:44

Germany's Sophisticated Ignorance Doesn't Even Look Sophisticated Anymore Featured

In Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream, I stated:

This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredly bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong w.ords, strong words are necessary for a dire situation. Let's consider this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positions that the majority simply didn't have the foresight, temerity (or balls) to implement and hold on to.

The constant and consistent belief that Germany is a bullet-proofed save all is foolish at best. Germany lives in the same economic malaise roach motel as the rest of the EU, they simply rented the penthouse suite! Pushing them to build up more debt to push additional debt on over-indebted nations who clearly can't pay back their current debt is quite foolish. Recession and depression looms everywhere. As clearly articulated in the orginal "Sophisticated Ignorance" article...

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the sovereign states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big. 


As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ultimately witnessing the private banks fail anyway.

I warned of this in the beginning of the year via my many proclamations on the FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly. We also warned in Deustche Bank as follows:

As derived and excerpted from icon Euro Bank Sovereign Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):


What is the result of throwing pound after pound of leveraged fiat currency meat into the hungry maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...


The afore-linked document has Deutsche Bank's exposure to the PIIGS group oulined and detailed. There is another angle that we covered early last year as well. Reference file iconDeutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional or Deutsche Bank vs Postbank Review & Summary Analysis - Retail.

Well,  look what we find in the MSM headlines this morning... European Banking Regulator Imperiled by Zombie Banks in Germany

Germany’s regulator balked last year when the European Banking Authority conducted stress tests on financial firms, objecting to the agency’s definition of capital and allowing one state-owned lender to withhold some results.

The refusal to go along with the European Union regulator reflects an aversion by governments to ceding control to a central authority that may doom talks about creating a banking union and thwart plans to shift the burden of bailing out Spanish and Irish lenders to other euro-area nations. 

“Germany didn’t let the EBA dictate any terms to its troubled banks, why would it now hand over controls to a new regulator?” said Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm specializing in sovereign-credit risk. “The prospects of a new central authority are shaky at best.”

EU leaders agreed in June to use common funds to inject cash directly into banks once a new regulator is established. Until then, Spain will be on the hook for as much as 100 billion euros ($123 billion) it may need to borrow to recapitalize its banks. That means increasing the public debt level, already strained by budget deficits, a second recession in four years and regional governments strapped for cash.

Well, you can't say I didn't tell you s, re: Spain...


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