Tuesday, November 22, 2011

Flawed Role Model, Germany's Finances Not as Sound as Believed and way over the EU's limit....

Flawed Role Model, Germany's Finances Not as Sound as Believed and way over the EU's limit....


Lucas Papademos and Mario Monti will have to lead the governments of Greece and Italy, respectively.....

ZIOCONNED GERMANY of Frau Angela Merkel kowtowing to CIA-MOSSAD for Years....and Years and Years....


The German government likes to pride itself on its solid finances and claim the country is a safe haven for investors. But Germany's budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU's limit. In some respects, Italy's finances are in much better shape....

When it comes to fiscal stability, frugality and responsible economic management, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have only one role model: themselves.

The chancellor praises herself and her team for having "a clear compass for reducing debt," and insists: "Getting our finances in order is good for our country."

Her finance minister, a member of Merkel's conservative Christian Democrats, is no less effusive. Germany, says Schäuble, is a "safe haven" for capital from around the world, because "the entire world has great confidence in both the performance and soundness of the fiscal policies of the Federal Republic of Germany."

Developments in the financial markets seem to bear him out. Last week, the suspicions of international investors reached the stable core of the euro zone. Investors embarked on a massive selloff of securities issued by supposedly model countries like Finland and Austria and sought refuge in German government bonds.

Role Model Position at Risk

But it is debatable how much longer Germany can be seen as a refuge of stability and security. In reality, German government finances are not nearly in as good shape as the chancellor and the finance minister would have us believe. The way that certain important indices are developing suggests that Germany may not retain its position as a role model in the long term. Government debt as a percentage of GDP is already at more than 80 percent, which compared to other European Union countries is by no means exemplary, but in fact average at best.

When it comes to their debt-to-GDP ratios, even ailing countries like Spain are in better shape, with values significantly lower than 80 percent. Critics, irritated by Merkel's and Schäuble's overly confident rhetoric, are beginning to find fault with Europe's self-proclaimed model country. "I think that the level of German debt is troubling," says Luxembourg Prime Minister Jean-Claude Juncker, whose country has a debt-to-GDP ratio of just 20 percent.

Despite the nascent criticism, Merkel and Schäuble will be patting themselves on the back once again at this week's final debate on the 2012 federal budget in the Bundestag, the German parliament. They will point out that Germany is in much better shape than its partners in the euro zone, not to mention the United States. They will also praise conditions in the labor market, rising tax revenues and the declining budget deficit.

It is certainly true that Schäuble expects the German deficit to decline from 1.3 percent of GDP this year to less than 1 percent next year. But it's none of his doing. In fact, he wants to incur more debt next year than in 2011. It is only state and local governments that are slated to borrow less next year, thereby helping to reduce Germany's deficit. In contrast, Schäuble expects €26 billion ($35 billion) in net new borrowing in 2012, an increase of several billion euros over this year.

Flush with Cash

The reason for the embarrassing increase is a noticeable reduction in austerity efforts. Flush with cash, Germany's coalition government of the conservatives and the business-friendly Free Democratic Party (FDP) has rediscovered its taste for spending money. At their most recent meeting, the leaders of the CDU, its Bavarian sister party, the Christian Social Union (CSU), and the FDP approved new spending that will place a significant burden on the federal budget in the future.

For example, Transportation Minister Peter Ramsauer of the CSU will see his funding for 2012 increase by €1 billion over the previously budgeted amount. Ironically, in its most recent assessment the German Federal Audit Office already criticized Ramsauer for not spending the funds allocated to his ministry sensibly.

Some €1.5 billion have been earmarked for a child-care subsidy that the government plans to grant parents who choose not to use public child-care facilities but to look after their pre-school children at home instead. The German government is also reintroducing the full Christmas bonus for civil servants, to the tune of €500 million.

The government will spend €1 billion to fund a planned subsidy for private long-term care insurance, as well as €4 billion on previously announced tax reforms. "Merkel and Schäuble have now abandoned the goal of budget consolidation," says Carsten Schneider, budget affairs spokesman for the opposition Social Democrats (SPD). "The money is being squandered on child-care subsidies and tax cuts." Jens Weidmann, the president of Germany's central bank, the Bundesbank, warns that the tax cuts at least will have to be offset elsewhere in the budget. "Germany mustn't lose any time in balancing its budget," he says.

The mood of generosity has also taken hold at lower levels within the coalition. For instance, the budget committee approved €60 million in additional funding for the government commissioner for culture and the media, Bernd Neumann, whose budget was originally targeted for €15 million in cuts.

Other key figures also suggest that Germany is not doing as well as some believe. Admittedly, the budget deficit continues to shrink. And the federal government budget actually seems to be well on its way to complying with a new "debt ceiling" rule in the German constitution that requires the government to reduce new borrowing to almost zero by 2016.

Primary Colors

But a balanced budget alone is not enough to bring the debt ratio, now at more than 80 percent, down to the 60 percent of GDP that is required under the Maastricht Treaty within a reasonable amount of time. In fact, many economists believe that budget surpluses are needed if this goal is to be achieved. They have in mind a figure known as the primary balance, which is the difference between government revenues excluding new debt and government spending excluding debt-service costs (i.e. interest payments).

If this balance is in positive territory, a country can cover its current expenses and meet at least some of its debt service obligations. If it is negative, the country must service all of its old debt with new borrowing, resulting in a rapidly growing mountain of debt.

The primary balance became an important figure in the bailout programs for Greece, Portugal and Ireland. In return for support payments, the donor countries, most notably Germany, expect the recipient countries to generate high primary budget surpluses for years. They argue that this is not only absolutely necessary, but also feasible.

Ironically, Germany has rarely lived up to its own standards in the past. From 2002 to 2006, for example, the country's primary balance was chronically in deficit.

By comparison, Italy generated an average primary surplus of 1.3 percent of GDP in the same period. According to projections by the European Commission, Germany will not even be in the same ballpark until next year. In 2013, it is expected to reach a primary surplus of 1.5 percent.

Again by comparison, Italy is projected to achieve a primary surplus of 3.1 percent next year and 4.4 percent in 2013. If the government of new Italian Prime Minister Mario Monti imposes austerity programs, as called for by European Central Bank (ECB) President Mario Draghi and others, the surpluses will likely be even higher.

Hard Goals

Germany is still a long way from numbers like these, which makes the goal of stabilizing the debt-to-GDP ratio at 60 percent a distant one indeed. To achieve this target within 10 years, says Christian Breuer, a financial expert with the Munich-based Ifo Institute for Economic Research, "Germany, even under optimistic assumptions, would need a primary surplus of 2 percent."

Thorsten Polleit, chief economist of Barclays Capital Deutschland, arrives at even higher numbers in an unpublished study. Primary surpluses of 2.7 percent are necessary to bring down the debt level to the 60 percent limit within a decade, says Polleit. He adds that surpluses of 4.7 percent would be needed to achieve the same goal within five years.

So far the German government has based its budget forecasts solely on the presumption of strong economic development. This is not likely to be the case for much longer, especially if the economy continues to cool down and tax revenues decline. Polleit believes that Schäuble's failure to economize during the economic upturn is now coming home to roost. "As a precautionary measure, the German government should impose a new austerity program," says Polleit, noting that if it does not, Germany will run the risk of being scrutinized more closely by the rating agencies. "Their top rating for German bonds is everything but guaranteed."

Indeed, the goodwill Germany is now enjoying on the bond markets, to the delight of its finance minister, could quickly evaporate. Yields on German government bonds are currently at record lows, with 10-year bonds offering returns of only about 1.8 percent. But if those interest rates were to increase by an average of only 1 percent, the German government budget would face an additional annual burden of €20 billion in the medium term.

Not Ambitious Enough

Nevertheless, Schäuble feels that he is on the safe side. At the moment, he can easily satisfy the constitutional debt-ceiling requirements, which force him to continue reducing the deficit. In each year until 2015, Germany's new borrowing will remain about €10 billion below the imposed upper limit.

This has less to do with Schäuble's willingness to cut spending than with the fact that his estimate of the baseline figure for reducing debt was much too high last year. Thanks to high tax revenues, he is now able to keep new borrowing well within the debt-ceiling requirements.

The FDP feels that Schäuble is too unambitious for its taste. It wants to force the finance minister to consolidate finances more vigorously. The Free Democrats are demanding that Schäuble already achieve the goal of a federal budget that includes almost no new borrowing in 2014, rather than two years later.

"By doing that, we would demonstrate how serious we are about sorting out our finances," says FDP budget expert Florian Toncar. "That should be worth every effort on our part."

Translated from the German by Christopher Sultan...

Often, when I troll around websites of entities like the ECB and IMF, I uncover little of startling note. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.

That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic - an interactive Inflation Game (I kid you not) where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.

What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it'll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.

We're doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries. It’s not about inflation - it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It's not the 'inherent' weakness of national economies that a few years ago were doing fine, that's hurting the euro. It's the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our sub-prime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri, entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not 'necessarily represent the views of the IMF or IMF policy’. )

The paper is full of mathematical formulas and statistical jargon, which may be why the media didn't pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out. And it’s fascinating stuff.

Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US sub-prime asset crisis, and more specifically, the advent of Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.

The US sub-prime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

Greek banks bought US-minted AAA assets and leveraged them. Norway did too (through the course of working on a Norwegian documentary, I discovered that 8 tiny towns in Norway bought $200 million of junk assets from Citigroup, borrowed money from local banks to pay for them, and pledged 10 years of power receipts from hydroelectric plants in return. The AAA assets are now worth zero, the power has been curtailed for residents, and the Norwegian banks want their money back--blood from a stone.) The same kind of thing happened in Italy, Spain, Portugal, Ireland, Holland, France, and even Germany - in different degrees and with specific national issues mixed in. Problem is - when you’ve already used worthless collateral to borrow tons of money you won’t ever be able to repay, and international capital slams you in other ways, and your funding costs rise, and your internal development and lending cease up, you’re screwed - or rather the people in your country are screwed.

In the IMF paper, the authors convincingly make the case that it wasn’t just the US sub-prime asset meltdown itself that initiated Europe’s implosion, but the fact that our Federal Reserve and Treasury Department adopted a reckless don't-let-em-fail doctrine. Even though Bear Stearns and Lehman Brothers failed, their investors, the huge ones anyway, were protected. The Fed subsidized, and still subsidizes, $29 billion of risk for JPM Chase's acquisition of Bear. The philosophy of saving banks and their practices poisoned Europe, as those same financial firms played euro-roulette in the global derivatives markets, once the sub-prime betting train slowed down.

The first fatal stop of the US bailout mentality was the ECB’s 2010 bailout of Anglo Irish bank, which got the lion’s share of the ECB's Irish-bailout: $51 billion euro of ELA (Emergency Loan Assistance) and $100 billion euro of regular lending at the time.

After the international financial community saw the pace and volume of Irish bank bailouts, the game of euro-roulette went turbo, country by country. More 'fiscally conservative' governments are replacing any semblance of population-supportive ones. The practice of extracting ‘fiscal prudency’ from people and providing bank subsidies for bets gone wrong has infected all of Europe. It will continue to do so, because anything less will threaten the entire Euro experiment, plus otherwise, the US banks might be on the hook again for losses, and the Fed and Treasury won’t let that happen. They’ve already demonstrated that. It'd be just sooo catastrophic.

In the wings, the smugness of Treasury Secretary Tim Geithner and Fed Chairman, Ben Bernanke is palpable – ‘hey, we acted heroically and "decisively" to provide a multi-trillion dollar smorgasbord of subsidies for our biggest banks and look how great we (er, they) are doing now? Seriously, Europe – get your act together already, don't do the trickle-bailout game - just dump a boatload of money into the same banks – and a few of your own before they go under – do it for the sake of global economic stability. It’ll really work. Trust us.’

Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don't have much exposure - it's all hedged. (Like it was all AAA.) The press doesn't tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners.

Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrounding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment. Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, unc-ontained, rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.....

Josef Ackermann is a busy man this autumn. Hardly a day goes by that the Deutsche Bank chief, despite his impending departure from the bank, doesn't hold a speech on the current financial crisis that has gripped Europe. And more often than not, his talk centers on the immense problems faced by the sovereign bond market. Nobody, it would seem, wants state bonds anymore.

Germany's top banker is not alone with his concern about the problem. The entire financial world is in turmoil this autumn. Once seen as iron-clad investments, state bonds are no longer seen as secure -- particularly since the European Union agreed to a 50 percent debt haircut for Greece in October. It can, warned Andreas Schmidt, president of the Association of German Banks, earlier this week, no longer be taken for granted that countries can turn to the capital markets to finance their budgets.

The truth of Schmidt's statement became readily apparent this week. On Tuesday, Spain auctioned off three-month and six-month bonds, a sale that in normal times would be quick and easy. Interest rates of 3 to 4 percent on such sales are normal. But this week, Madrid had to pay 5.11 percent and 5.23 percent respectively, the highest it has had to pay on such bonds in 14 years -- and up significantly from the 3.30 percent it paid on six-month paper as recently as October 25. Even Greece didn't have to pay as much on a similar offering recently.

And the problem isn't just limited to indebted euro-zone countries. Banks too have run into difficulties as a result of the sudden aversion to sovereign bonds. Most of them, after all, have significant amounts of sovereign bonds on their balance sheets -- making other banks extremely wary of lending to them. Indeed, the European Central Bank said on Tuesday that 178 banks borrowed €247 billion in one-week loans from the ECB -- the most since early 2009 when the last financial crisis was at its peak.

Mistrust of EU Bonds

"There is, at the moment, a collective mistrust of European sovereign bonds and banks," said Eugen Keller, a financial market expert with the Frankfurt-based private bank Metzler.

US money market funds have long since withdrawn from the European common currency zone. American and British banks have also become extremely careful when it comes to doing business with European financial institutes. "The willingness of investors to engage in banks on the longer term is not particularly pronounced," Deutsche Bank head Ackermann said in describing the phenomenon. Were the ECB not on hand to provide banks with cheap money -- since 2008, it has been allowing banks to borrow as much as they need to overcome liquidity shortfalls -- the situation would look much worse, Ackermann added.

In an effort to win back investor faith, European banks are doing everything they can to clear their books of state bonds. According to an estimate from the US investment bank Goldman Sachs, the 55 largest European banks reduced their holdings of Italian bonds by €26 billion just in the three months between the end of June and the end of September -- roughly a 30 percent decrease. Holdings of Spanish bonds have also plunged by a similar percentage, equating to €6.8 billion. The trend is likely to have continued in October and November.

Most of the bonds shed by the banks have likely landed on the balance sheet of the ECB, which has been on a bond-buying spree since May 2010 in an effort to push down sovereign bond interest rates. But the effort has not been met with unreserved success. So far, the ECB has amassed euro-zone bonds worth €195 billion -- and the interest rate on Italian bonds still edged up to 6.8 percent on Tuesday. That is down from the highs of earlier this month, but still worryingly close to the 7 percent mark that is widely considered to be unsustainable on the long term.

Ultimate Survival

Still, many feel that the ECB is not doing enough and would like to see it embark on a gigantic bond shopping spree in an effort to calm the financial markets. But the ECB has remained resistant to being turned into Europe's lender of last resort -- a position vehemently supported by Germany's central bank and by Chancellor Angela Merkel.

But the problem is not likely to disappear overnight. And the longer the double-crisis -- of state debt and bank liquidity -- continues, the more dangerous it will become for the ultimate survival of the euro. The two are, after all, dependent on each other. Countries need liquid banks to purchase their bonds and the banks need financially solid states as guarantors of the state bonds on their balance sheets. At the moment, neither half of the relationship is functioning properly.

Over the weekend, the world's largest sovereign bond buyer Pimco sounded the alarm. "This is just a repeat of what we saw in 2008, when everyone wanted to see toxic assets off the banks' balance sheets," Christian Stracke, head of research for Pimco, told the New York Times.

Keller, the analyst from Metzler, also sees parallels. "Back then, it was shoddy US real-estate loans that was causing the banks problems," he says. "Today it is the European state bonds that everyone thought were so safe."

The comparison with 2008 is frightening. Following the fall of the investment bank Lehman Brothers, the entire financial system faced collapse. And this time, the condition of the markets is, if anything, even worse: The crisis has eaten its way deep into the credit system. The entire method by which European countries access money is under threat -- and by extension, so too is European prosperity.

Keys in Berlin

It is a situation that has become unsustainable on the long term. If Europe is not able to quickly re-establish faith in European sovereign bonds, a downward spiral of fear and debt could be the result.

The key to preventing that spiral from gaining momentum lies in the hands of the German government. Germany is, at the moment, the only euro-zone country that investors continue to trust unreservedly -- which can be seen in the low interest rates that Berlin must pay on its sovereign bonds.

It is a trust that Merkel's government is hesitant to loan out, as would be the case were so-called "euro bonds" -- essentially a pooling of euro-zone debt -- to be introduced. Experts, though, think that the chancellor will soon be forced to buckle. "I think that it is only a question of weeks before we have to say: all for one, one for all," says Keller.

The implication is clear. Either Germany will have to guarantee the debts of other euro-zone countries in the form of euro bonds. Or the ECB will have to jump in and buy massive quantities of bonds from highly indebted currency zone members. A third alternative doesn't exist.


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