German playing chess while Monti / Hollande / Rajoy playing checkers ?

http://www.zerohedge.com/news/germany-cries-europe-coming-our-money-greece-promptly-obliges

Germany Cries: "Europe Is Coming For Our Money", Greece Promptly Obliges

Submitted by Tyler Durden on 06/30/2012 22:25 -0400

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"Greece is an exception in the Euro Zone" - Angela Merkel,December 9, 2011

"Exception from ESM Seniority only applies to Spanish aid" -Angela Merkel, June 29, 2012

It took about a year, but finally Germany, with a little assistance from Merkel on Friday morning, has figured it out. And is now blasting it on the front page itsnewpapers:

Translated:

Europe is coming for our money!

What else does Die Welt say:

When economic historians in a few years determine the turning point at which the euro zone turned into a debt community, they may refer to the last Thursday night. In those dramatic hours when Angela Merkel after massive pressure from Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy buckled - and agreed to an agreement whose scope is now very difficult to estimate.

Specifically, what is now painfully clear to everyone in Germany is that if indeed Merkel's declarations over the past few days are to be taken at face value, then Germay has just lost control over European supervision: a topic very near and dear to all Germans' heart, as up until this point money would be handed out only in exchange for conditionality. A move whie Welt calls a paradigm shift: "To date the Germans insisted that the €-aids come equipped with shackles. Money was always associated with reform programs that were monitored by the Troika of the EU, European Central Bank (ECB) and International Monetary Fund (IMF)." That is now no longer the case. At least according to conventional wisdom:

Precisely for this reason were countries like Portugal and Ireland long afraid to apply for assistance. Now dipping into the bailout pot will be far easier... The federal government has always stressed that any bailout will come with strict conditions. Now all has changed, partly because of pressure from the financial markets. Italy and Spain struggling with risk premiums at record levels. So far, however, they refused to implement emergency measures. That could now change. Monti has already cheered: "the Troika will never come to Rome."

Die Welt may be on to something: while in the case of the Spanish bailout, the European action opened the door for proactive demands for future assistance, what happened last week, has also activated the retroactive lever, and the cries for equitable EFSF/ESM treatment (where there is no seniority for bondholders despite Citi's clear explanation the EFSF and ESM willalways have implied seniority over other private sector bondholders no matter what promises politicians throw around) will now come from all the other countries bailed out by Europe. Because what kind of union is it if among the countries in distress some are more equal than others. After all, first it was only Greece who was an exception. Now it is Spain. Who will be the next exception? But before we answer that, we already know how long it took Greece to demand the same treatment as that offered to Spain: 24 hours.

From Kathimerini:

Athens to ask for EFSF deal to apply to Greece, too

The government is considering to ask for the European Council agreement of Thursday for banks to get direct funding from the European Financial Stability Facility (EFSF) to apply to Greece, too, even though the recapitalization of local lenders was agreed to be included in the state’s bailout agreement.

The issue was discussed, according to reports, during a meeting at the Prime Minister’s residence in Athens on Saturday evening, ahead of the visit of the representatives of Greece’s creditors from Monday.

And since in Europe now every beggar is empowered to be a chooser, there is no stopping how much Germany will have to pay out of pocket to keep the insolvent ones content.

Main opposition leader Alexis Tsipras urged the government on Saturday to press for local banks to benefit from the new system of direct recapitalization from the EFSF, or threaten to veto the European Union’s Treaty for Stability Co-ordination and Governance and refuse to accept the visit of the creditors’ inspectors in Athens.

Expect many more demands from Ireland and Portugal next. Also expect many more and far angrier headlines from Germany.

All of this means, that as we calculated last July, with Germany no longer able to kick the can, Merkel will soon have to front well over 50% of its GDP just to keep the Eurozone alive. it also means that, as we again said last July, spreads of core European bonds will soar in a great compression trade where the PIIGS become the core and vice versa, another outcome will anger Germany even more.

There is however a catch: earlier today we speculated that Merkel's move was merely one that puts the Constituional Court, and thus referendum play in action. Already numerous parties are demanding that the highest court scrap the ESM as it is both undemocratic and unconstituional.

The European Stability Mechanism (ESM) and the Fiscal Pact have been approved by the German parliament. But thousands of Germans have joined forces to take legal action against these measures.

The Euro Stability Mechanism's capital stock of 700 billion euros is intended to provide a buffer against the convulsions of the euro debt crisis. The 17 signatory states will each pay a proportional amount into the ESM - irrevocably and without restrictions - or set the money aside to be handed over, if required.

Capital not yet paid in can be called on at any time by the Board of Governors, the main body of the ESM. And this Board, consisting of the respective members of governments with responsibility for financial matters, has the power to change the level of the authorized capital stock, i.e. increase it. The ESM can make loans and accept collateral from banks.

Also as we reported earlier, both Schauble and Weidmann would be delighted if things get to a referendum. And in the aftermath of last week's massive optical loss for Merkel, so will she. If it indeed gets to a referendum, Mario Monti may be far less exuberant with the outcome.

However, assuming that there was no grand master plan behind last week's decision, here is, once again, our math from last July showing just how much of Europe's bailout funding Germany has just footed. Keep in mind the context then was just Greece, as Italy and Spain were both "safe", now that is no longer the case. What hasn't changed one bit is the logic behind the amounts that Germany will have to backstop between Italy and Greece. To wit, from over 11 months ago:

• An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This number is even bigger now.

And what is truly hilarious is that all of thiswas already at the forefrunt of debate last summer, when the EFSF was once again thebailout ex machina, only then the world and capital markets were a little bit smarter, and realized that there was simply not enough cash to cover the funding needs of both countries. This in turn led to the whole 3x-4x leverage debate that would bring the EFSF to €1 trillion: a plan which was scrapped some time in October and promptly forgotten once it was deemed unfeasible.

In other words we are right back where we started one year ago! Next up: cue the debate over how to increase the funding ot the EFSF/ESM bailout complex. Just like last year. And cue the 3x-4x bailout fund leverage expansion discussions for August-September 2012, once again in carbon copy replica of 2011, all only to be quickly forgotten. Because institutional memories sure are short. And because there is just no more money left.

So for all those who have forgotten last year's full mathematical analysis (because math still trumps politican lies and empty promises any day), here it is. All over again.

* * *

The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP

A funny thing happened in Euro spreads today. While the bonds of all PIIGS countries surged higher in price (and plunged in yield) upon the announcement of the second Big Bang bailout, the reaction in core Eurozone credit was hardly as exuberant, and in fact spreads of the two core European countries pushed wider by the end of the day, and over the last week. Why? After all the elimination of peripheral risk should have been seen as favorable for everyone involved, most certainly for those who had been seen as supporting the ever more rickety house of European cards. Well, no. Basically what happened today was a two part deal: the i) funding of future debt for countries that are currently locked out of the market (all the PIIGS and possibly core countries soon) or in other words the "liquidity mechanism" which is being satisfied by the EFSF "TARP-like" expansion, and ii) the roll-over mechanism for existing holders of debt which "allows" them to "voluntarily" transfer existing obligations into a "fresh start" Greece which can then emerge promptly from the Selective Default state that is coming from Moody's and S&P any second, and supposedly allow the country to access markets as a non-bankrupt country.

For all intents and purposes the second can be ignored, because as has been made clear over the past few days, and as will be demonstrated below, the actual rollover from non-Peripheral banks will be de minimis, the bulk of impaired debt being held by banks in the host countries as is, and used as collateral with the ECB in the form of par instruments for cash.

Now the second part of the mechanism was never an issue further demonstrated by the plunge in net notional in Greek CDS as core banks no longer needed to hedge exposure and instead opted to divest their holdings. This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub. In a just released report by Bernstein, which has actually done the math on the required contributions to the EFSF by the core countries, the bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium. As AB says, "its firepower would have to rise to €1.45trn backed by a total of €1.7trn guarantees." And here is where the whole premise breaks down, if not from a financial standpoint, then certainly from a political one: "As the guarantees of the periphery including Italy are worthless, the Guarantee Germany would have to provide rises to €790bn or 32% of GDP." That's right: by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!

The Europarliament, ECB and IMF may have won their Pyrrhic victory today... But what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly.

Below is Bernstein's full breakdown:

Continuation of the current strategy with a materially enlarged EFSF and private sector participation in liquidity support

Despite the failure of the current strategy, there is still a theoretical option of an extension of the current liquidity support with a materially enlarged EFSF that would also be buying government bonds in the secondary market. We believe this is the least likely option given the size of the fund required to achieve the objective.

An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This strategy is not only unlikely to succeed but would also run into some serious structural difficulties. To cover 100% of the roll-over for Greece, Portugal, Ireland, Spain, Italy and Belgium as well as an allowance for bank support at 7% of the banks' balance sheets until the end of 2013, the support mechanism(s), would need to be able to deploy a total of €2.4trn in available funds.

Assuming the Greek Loan facility and the EFSM remain in place, the EFSF would have to increase its deployable funds from currently about ~€270bn to €1,450bn.

Given the 20% overcollateralization requirement on the current EFSF structure and the fact that countries that receive EFSF support are not able to provide valid guarantees mean that in order to create a €1.45trn funding capacity, the total fund would have to be €1.7trn. The guarantees to be provided by Germany would have to be €791bn or 32% of GDP.

There is a legitimate question whether in particular Germany would see the point of committing that kind of support to a concept that has so far been extremely unsuccessful. It also would expose Germany to a worst case scenario of a French downgrade. Without France, the guarantee need would rapidly move towards the whole of the €1.7trn. As the market is getting increasingly concerned about France, the odds are heavily stacked against an extension of the EFSF as a pure liquidity support mechanism.

If Banks were to participate in a liquidity expansion their contribution would be minimal

Within the current strategy one of the open questions is whether or not the private sector can participate by providing liquidity to the periphery countries. We believe this to be a fundamentally marginal discussion despite its enormous political importance.

Based on the stress test data released on Friday, we find that whilst the banks account for the majority of the very short term paper, their total share of the funding requirement into 2013 is just 23% and 16% of the total EFSF.

The question is how big the private sector participation could be. Taking the "French proposal" as a guide, the private sector participation would reduce the size of the EFSF by €137bn or 9% of the €1.45bn EFSF funding, assuming 70% of the debt is rolled over, 30% collateralization and 75% of banks participate.

The problem with this private sector participation so far has been the risk that this may be regarded as a default by the rating agencies. As a consequence the banks would have to write down these exposures to market prices. This exercise would lead to reported write-downs for the European banking sector of €75bn, 0.55 times more than the liquidity support that the EU is seeking. And in particular in Portugal and Greece the fallout of the MTM losses far outstrips the increase in liquidity.

Even more importantly, more than half of these losses would occur in the banks of the periphery countries themselves. In the absence of an open market for these banks, the losses would have to be made up by the governments themselves and subsequently added back to the EFSF utilization.

---

And there you have it: the cost of the euro not plunging today as a result of the ECB not proceeding with outright monetization, is that Germany is now the ultimate backstopper of all of Europe's risk. And while before, when the EFSF was just over €400 billion or so, the market could largely ignore the risk, a €1.5 trillion "upgrade" certainly changes the equilibria dynamics. In an attempt to avoid the appearance of inviting inflationary pressures on Trichet's central bank, Germany has directly onboarded the risk associated with terminal failure of this latest and riskiest "bailout" plan and in doing so may have jeopardized anywhere between 32% and 56% of its entire annual economic output. One wonders if the risk of runaway inflation is worth offsetting the risk of a plunge into the worst depression in the nation's history? It sure isn't for the Fed.

The most ironic outcome would be if the eurozone, in an attempt to prevent further contagion at the periphery, simply invited the vigilantes to bypass Italy (recall how everyone was shocked that instead of attacking Spain, it was Italian spreads that got destroyed in a manner of days), and head straight for the country on whose shoulders lies the fate of the entire EUR experiment?

Is Atlas about to shrug and topple the entire oh so heavy house of cards?

http://www.zerohedge.com/news/was-merkels-surprising-defeat-merely-gambit-german-referendum

Was Merkel's Surprising "Defeat" Merely A Gambit For A German Referendum?

Submitted by Tyler Durden on 06/30/2012 11:28 -0400

• Eurozone
 
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As details from Thursday's European Memorandum of Understanding, which has all the binding power of a 'highly confident letter' issued by a third tier investment bank, continue to be non-existent, the questions, and conditions, are accumulating fast. While the ESM passed with a solid majority in both the lower and upper houses of German parliament yesterday, its fate is now in the hands of the German constitutional court which as reported previously has requested extra time to study the bailout plan, before it gives the all clear for a presidential signature. Sound familiar? And barely did the ESM pass the ratification vote, before lawsuits alleging its unconstitutionality start pouring in. But probably more importantly, Focus magazine reported overnight that the first clear condition from Germany will be the enactment of a Financial transaction tax for all countries where the ESM would be operational in order to minimize the burden on German taxpayers. In other words, banks would effectively pool their profits, in order to fund the bailout of other banks (or their own). In retrospect, it does not sound like a bad idea. It may even pass the recently conceived "fairness doctrine" of the Great June Socialist Revolution. Most importantly, however, it appears that events over the past week may have been merely a gambit for something that Schauble and Weidmann have already hinted at: a popular referendum that decides the fate of Europe once and for all, washing Merkel's hands and letting the people decide if they want the European experiment to continue or not.

From Dow Jones:

The German government wants to tie using the funds from the permanent bailout fund to directly aid banks to the financial transaction tax, German news magazine Focus reported on Saturday citing sources. 

The German government intends to push for the condition that only banks belonging to the countries that institute a financial transaction tax would be able to directly access funds from the European Stability Mechanism, the magazine said. The countries would then use the additional revenue from the tax to fund  the ESM, reducing the burden on German taxpayers. 

So which countries will find their sovereign bonds tied to a transaction tax? From Reuters June 22:

Finance Minister Wolfgang Schaeuble said 10 countries were prepared to use an EU process known as 'enhanced cooperation' to push ahead with developing the tax, which Britain and other states, including some in the euro zone, oppose.

Enhanced cooperation requires at least 9 EU countries to agree to work on a proposal. France, Italy and Spain are all behind Germany with the initiative, German Chancellor Angela Merkel said after a meeting with her counterparts in Rome.

Revenue from such a tax, which some analysts estimate could raise more than 50 billion euros a year depending on the number of countries that participate, could be used to finance initiatives such as a fund to wind down bad banks.

"My impression is that quite a number of member states strongly support the proposal of an FTT (Financial Transactions Tax) in principle," Schaeuble said after a meeting of EU finance ministers in Luxembourg. "We should give it a try."

Which basically means that banks in countries that have no choice but to agree to a FTT effectively become utilities: something that should have happened in the US years ago. It also means that the banking sector will see itself "divested" of numerous jobs as remaining workers will scramble to go to those areas in the Eurozone where the FTT does not put a cap on bonuses.

Yet the other question is even if €50 billion can be raised each year from the FTT, where will the balance came from? Obviously, the bulk of it, will have to be sourced from Germany. Which then presents an interesting case: has Merkel's move over the past week been nothing but a gambit, to let a referendum, or a public vote on a European bailout, come into play? Should the constitutional court find a snag with the ESM it is very likely that Germany will have to resort to the popular measure, whose outcome will remove blame from Merkel for her actions once and for all.

One may say: "Preposterous, what referendum?" After all Greece's G-Pap was sacked by banker interests for even daring to propose such a thing. Actually, in the case of Germany it is not preposterous at all, and may be precisely the final showdown that Merkel and Schauble have in mind. Recall from Spiegel last week:

German Finance Minister Wolfgang Schäuble kicked a political hornets' nest when he suggested to SPIEGEL that a referendum on efforts to save the euro will have to be held sooner or later. German commentators jumped into the debate on Tuesday.

Merkel immediately distanced herself from Schäuble's comments, saying through her spokesman Steffen Seibert on Monday that any such referendum wouldn't be coming any time soon. But several other politicians indicated their support for the idea, including Social Democratic bigwig Peer Steinbrück and Patrick Döring, general secretary of Merkel's junior coalition partners, the Free Democrats. Steinbrück told the Stuttgarter Zeitung on Monday that "if you have been listening carefully to the Federal Constitutional Court, you would realize that there is no way around" a referendum.

Indeed, the decision over a referendum may ultimately not be a political one. Germany's Constitutional Court, the highest in the country, has recently indicated that the limits of the country's constitution have been reached when it comes to efforts to save the common currency. Already, the court is fielding several legal challenges to the European Stability Mechanism (ESM) and last week it controversially asked German President Joachim Gauck to delay signing the law until the court could fully examine the challenges. Last September, Constitutional Court President Andreas Vosskuhle said that further European integration would require a new constitution, making a referendum unavoidable.

...

"It is remarkable how quickly the CDU wants to stifle a debate that started with its own finance minister, Wolfgang Schäuble. His boss Angela Merkel called referendums over constitutional amendments dealing with Europe's future as a step for 'the day after tomorrow' … Sure, but actually, why not? … In recent months the tempo of political integration has accelerated. The fiscal pact, a banking union and joint liability -- all of this was unthinkable even just a short time ago. But so far politicians and citizens have been acting more as followers than framers. Often because leaders have delayed decisions until there were no other options."

"Politicians and citizens alike must be able to debate the alternatives in peace, weighing the pros and cons -- and to vote on them. Otherwise the EU loses its legitimacy. But this can't happen in just a few hours, as Merkel would apparently prefer. Instead we need a long and intensive discussion, both in parliaments and in the public. But for this to happen, one can't wait until the day after tomorrow. It should begin today."

So the question is: was the Vaffanmerkelcover nothing but a very Pyrrhic victory for the Italians? Because if indeed this is the chosen sequence of events, ultimately Merkel merely put the decision in the hands of the people. Correction: the angry people. Now that events are in motion, we will get the answer very quickly. As Focus write the lawsuits challenging the ESM are already piling in:

The first lawsuits against the consent laws for the European fiscal pact and the euro rescue ESM went immediately after adoption in the early hours of Saturday at the Federal Constitutional Court, the first law suits. Around midnight, was a messenger from the constitutional complaint of the CSU politician Peter Gauweiler at the gate of the court. The appeal of the "more democracy" that had attached themselves to the information about 12 000 citizens, was submitted to the highest German court. This action is supported by the former Justice Minister Herta Daeubler-Gmelin (SPD) and represented the Leipzig constitutional lawyer Christoph Degenhart. A lawsuit was faxed to the left, according to a party spokesman also immediately after the Federal Voting to Karlsruhe.

A total of five complaints against the actions in Karlsruhe announced. Federal as Federal had passed laws to multi-billion euro rescue package and the fiscal pact for more fiscal discipline before, each with two-thirds majority. The Federal Constitutional Court had asked President Joachim Gauck, to delay the signing of consent laws to ESM and Fiscal Pact, to the judgment of the decided Eilanträge the plaintiff. It is expected that this still happens in July.

"We complain of the contracts, because they mean a dismantling of democracy in two ways," said Däubler-Gmelin. "For one thing forever budgetary powers and sovereignty rights of the Bundestag to Brussels to be delivered. Thus, the Bundestag election is canceled. On the other hand, the ratification is quite hectic and over in the population. " In a press release Gauweilers it was said that fiscal pact as ESM would "cast in serious breach of the principle of democracy." So wear the ESM contract to dispose of hundreds of billions in tax dollars on a "democratically legitimized not organization"

In other words, was Merkel's surprising "defeat" on Thursday just a brilliant gambit to get her off the hook, and let the people decide where the chips may fall? It wouldn't be the first time Germany has fooled Europe about its true motives.

MUTTI MauLeR...

Submitted by williambanzai7 on 06/29/2012 12:24 -0400

• European Central Bank

Like Arnold famously said in the Terminator - Merkel channeling that line " I'll be back ( Monti ) ... "

We affirm our [viagral] com[munalist]itment [between football matches] to do what is [whoromoronically] necessary [until next time] to [detourne] the financial [in]stability of the euro [D Cup] area [as we have so ably intiated heretofootball], in particular by using the existing EFSF/ESM [edifices] in a [flexcurable], effluent and sodomologically circuminventive] manner [what else do we have?] in order to [insta-]stabilize markets [line up and lean over suckas] for Member States re[-in]specting their Country Specific Recommendations [hysterical demands on Tante Mutti] and their other com[munalist]ments [what a pretty word] including their respective timelines [to SOROs Doom], under the European Semester, the Stability and Growth Pact, the Macroeconomic Imbalances Procedure, [the Bilderberg Manifesto, the Collective Comitological Principles of EURO Nomenklat-oral and the Merkel Gaussian Bailout Cycle.]

These conditions should be reflected in a [fully unenforceable] [Magically Materializing] Memorandum of [Mis-]Understanding.

We welcome that the ECB has agreed to serve as a [LIBORactive] agent to EFSF/ESM in conducting [flexicurative] market [sodomization] operations in a [wickedly] [d]effective, [d]efficient [and fornicultural] manner.

This temporary solution has an expected shelf life of two obfuscated trading days.

Arriverderci Troika!