Saturday, June 5, 2010

Lombard Street Research: Germany Will Ditch the Euro

I think Lombard Street Research has this thing figured out.

The ECB purchases of PIIGS debt (which the ECB is sterilizing) are taking the debt off the books of French and German banks and adding them to the portfolio of the ECB. Once the German banks have off-loaded all the PIIGS debt, Germany will be free from elitist bank pressure preventing it from ditiching the euro, and they will then bring back the deutschmark. Here's how Charles Dumas at Lombard Street Research explains it:

The only way [Germany] is going to get the population to feel confident in this set-up will be to re-establish the deutschmark. The Germans never wanted this thing in the first place. It was foisted on them by their government and by the great minds of Brussels. If the government had been rash enough to have a vote on the euro it would have lost it. The thing is even more unpopular now than it was then; they don’t really like having their wages suppressed in order to subsidise Italy and Greece...

In the medium term, the prospects are high that Germany will leave. The ECB is now, against even the will of its future president Axel Weber, buying government bonds. Now while that was presented and intended as a relief mechanism to support the markets and keep rates down for Greece, it is also, as it happens, a natural preliminary to splitting up the euro, since it socialises the losses. Essentially the ECB gets dumped with all of these bonds that are currently in the hands of the French and German banks. If the whole thing is dumped on the ECB at least you’ve created a situation where you’ve split up the euro without having a banking crisis on top.


1 comment:

  1. I am critical of the way the Business Insider article is written, basically because it editorializes and does not provide reference-able facts.

    For example: "In the medium term, the prospects are high that Germany will leave." ... Says who, and like where are the facts?

    "The ECB is now, against even the will of its future president Axel Weber, buying government bonds." .... Where are the facts that the ECB is doing so to any great amount?

    Furthermore, I see greater integration coming quite quickly from which German will not be able to escape.

    The European Financial Stability Facility, that is the agency of grants and loans, is likely to be established Monday June 7, 2010, as Ian Traynor of The Guardian reports from Brussels in article Eurozone Plan For Common Bond Issue To Head Off Debt Crisis, that EU finance ministers are to meet in Luxembourg on Monday to establish the workings of the €750-bn (£650bn) safety net agreed last month following weeks of crisis and dispute.

    I will take the liberty to editorialize, I think the EFSF will eventually be transformed into a hierarchical and centralized European Government with Mr. Herman van Rompuy as the ruler, whose powers go far beyond dispensing loans in monetary crisis and I think things are moving so quickly and that Germany is so mired in internal conflict that it will be unable to escape. It's like you wrote a while back: a One Euro Government is coming; and I see a Sovereign and a Seignior rising to the top of that Government.

    Well thanks for your blog, it's just that I am critical of the idea that Germany is going to escape the embroglio.