Beware of the Germans …

Looking at Axel Weber’s comments, telling the world, that there is NO possibility of an ECB rate cut in current inflationary surroundings,
yes, he is reliable, but who does remind him, that 1987 the German Bundesbank triggered the crash by hiking rates???
Sometimes you need flexibility

Even worse in its long term implications could prove, that the EURO could collapse and cease to exist.

Yesterday’s article in U.K.’s Daily Telegraph highlighted again, why the ECB has to give such HUGE amounts to the markets …
trying to bail out the weak members of the EMU, Spain, Portugal, Italy and Greece.

The problem … again … is based on greed, stupidity and derivatives … sounds familiar?

UBS is quoted as follows:

UBS warned of a “funding freeze” for countries with very high current account deficits, such as Spain, Portugal, and Greece that have come to rely on in massive inflow of foreign money to plug the gap. Spain has built up the biggest cross-border liabilities with foreign debts of $362bn (£180bn), or 26pc of GDP. Italy has accumulated $275bn, Greece $129bn, Ireland $123bn, and Portugal $98bn. (This is already showing up in the spreads between German Govt debt and Govt debt originated in these countries)

Much of the funding has come from German banks and pension funds. They have shown a voracious appetite for cedillas (covered bonds) and other forms of Spanish debt at a voracious pace from 2005 to 2007. The yield was higher than stodgy offerings at home. The Germans have since brought down the guillotine.

“Following the market dislocation in July 2007, German buyers were almost entirely absent from the Spanish market,” UBS said. The cut-off has left some Spanish borrowers starved of funds. Many have instead turned to the European Central Bank for temporary funding, using unsold mortgage as collateral for loans at the Frankfurt window. This is becoming a political issue. “It may raise awkward questions within the ECB Council,” the bank added.

Under EU rules the funding is supposed to be “limited and temporary”. Spain’s banking association insists that the country’s lenders are still in good health, with a solid capital base. The investor flight from the region has already become visible in the surging yield spread between German 10-year Bunds and equivalent Latin bloc bonds. After remaining steady in the mid-20s for several years, the spreads began edge up last summer and finally exploded this week. They reached 70 basis points for bonds from Italy and Greece, two countries with towering public debts over 100pc of GDP. “It is certainly a wake-up call to be cautious about fiscal policy,” said ECB’s president, Jean-Claude Trichet.

A number of hedge funds and banks are betting on a further divergence, taking out “short” positions on Club Med debt with an offsetting “long” contract on Bunds. Goldman Sachs, BNP Paribas, and Deutsche Bank have all advised clients over recent months to take out such positions. The “liability” countries deemed most vulnerable to such attacks vary among themselves. Spain has a current account deficit near 10pc of GDP and a collapsing housing bubble, but is in good fiscal shape. Italy’s trade deficit is manageable but the country is falling into recession.

What all the southern countries have in common is a relentless loss of competitiveness against Germany, year after year for a decade. (Selling sun is not always good enough.)

UBS said it was unclear how Europe would deal with the likely crisis when it comes. EU rules forbid the ECB to provide liquidity to banks that are “potentially insolvent”.

An IMF study said the “larger countries will end up footing a disproportionately large share of the overall burden”. The Germans will not like that.

So at the end of the day, Germany might want to go away from the EURO

Conclusion: Whereever you look … problems mount … volatility is here to stay … markets have NOT adapted so far!!!

Tags: crash, Euro, Greece, Italy, Portugal, Spain, UBS, Weber

This entry was posted on Dienstag, März 11th, 2008 at 12:50 and is filed under FDAX. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.