CRASH 2: G20 Rescue plan runs into its first wall: Germany’s central bank.

Head of the Bundesbank, Jens Weidmann

The Slog has learned from Washington sources that German central bank President Jens Weidmann ‘will do everything in his power’ to stop any Bundesbank funds being used to create more ‘firepower’ in the fight to stop massive banking failures as and when Greece defaults.

For those who’ve been following Weidmann’s history, and his recent statements at the G20, his implacable opposition to the Geithner recapitalisation plan (as currently outlined) will come as no surprise.

“Stimulus financed by increasing the budget deficit in Germany is not appropriate,” Weidmann told reporters in Washington last Friday, “The  capital situation among German banks is better than it was in 2008 during the financial crisis, and undifferentiated calls for more bank capital are not helpful. Germany’s banks are in an orderly state, and we have lower risks after creating firewalls and effecting restructuring after 2008″.

This was an obvious swipe at Christine Lagarde (for whom Weidmann has no time) but was of course referring to QE-style economic stimulation rather than recapitalisation. However, I’m led to understand that, having held some Washington discussions in the meantime about the Tim Geithner-backed plan to ‘leverage’ EFSF funds, Herr Weidmann thinks the fundamental thinking behind the plan is fatally flawed.

“The word is that he finds the idea of borrowing to create more failsafes against debt default just more can-kicking,” said The Slog’s most favoured source. “Weidmann has opposed the ECB’s bond-buying programme all the way. He’s already a thorn in Merkel’s side. There’s no way he’d acquiesce in a scheme to raise more money. He’s of the [Jurgen] Stark school: no more bailouts.”

Weidmann has an unusually high profile in Germany for a banker. He has come to assume the mantle of the last staunch defender of monetary stability – views shared by his predecessor, Axel Weber, and the ECB’s former chief economist, Jürgen Stark, both of whom stepped down from their positions because it was getting too lonely on their side of the ECB table.

But Weidmann is no quitter: he plans to fight any and all future attempts to reward fiscal indiscipline, and he has a talent for courting publicity. He gives speeches and interviews, telling Der Spiegel in a splashed interview last week that “if monetary policy intervenes in the markets, the pressure on the affected governments to introduce the necessary reforms is reduced. It is both wrong and highly dangerous to create the impression that the ECB is the only player capable of taking action in the crisis. Fiscal policymakers are fundamentally capable of taking action.”

The Geithner plan as currently constituted involves a central role for the ECB’s firepower. This is something with which Jens Weidmann cannot live. He ridiculed some of the statements made by Europe’s finance ministers in Wroclaw, and continues to have serious talks with the members of the budget sub-committee of the Bundestag. Although outnumbered, Weidmann is trying to rally a majority of ECB council members to re-adopt the “monetary-policy principles that Germany believes in”. So too does Angela Merkel (for whom Weidmann used to work) but her bending to further bond purchases has caused him to attack her too.

As a hardline fiscal disciplinarian, Weidmann personifies the split between the can-kicking Trichet way of doing things, and the reality-facing ‘take the hit and learn from it’ approach more common in Anglo-Saxon States. In private, the Bundesbank chief reviles both EU bureaucrats and their political fellow-travellers, and at times it’s easy to see why. ‘We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet,” one senior European official told Reuters at the IMF junket yesterday.

Angela Merkel is relaxed about the fact that Weidmann’s new job makes him the champion of the Bundesbank’s traditional positions. But that doesn’t mean she has to be loyal to his stance: despite a hard-faced public attitude to ‘good money after bad’, Merkel supported the recent bond purchases because, like Wolfgang Schauble, she believes a Greece remaining solvent and in the eurozone will buy time for the EU authorities to strengthen the major eurobanks.

On this lastest G20 plan, however, she has remained silent. It could be that she no longer feels strong enough domestically to take on a charismatic and patriotic central banker rapidly turning into some sort of quasi-political pop star.

Stay tuned.

53 thoughts on “CRASH 2: G20 Rescue plan runs into its first wall: Germany’s central bank.

    • Why did my uncles die in WW1 and WW2? Why did Werner von Braun try to kill me as a 4 year old?

      No Krauts and none of their sadomasochistic homophila!

    • @william: I’m with you 100% on that. Strict monetary management is the fundamental strength of a successful economy. Too bad that successive govts here have never understood that and the Latinos never will.

  1. Weidmann is right.
    That said, the German political elites at the time of euro introduction have a lot of responsibility for the mess. They should never have signed up to a common currency which was overtly a socialist political project and without demanding that the Bundesbank was in control of it. They are now paying the price. It’s not too late to correct this dogs breakfast.

  2. At the risk of sounding like an old bore can I please remind discerning readers of a very salient fact.

    Under the terms of the Lisbon Treaty it is illegal for EU member states to bail out Euro countries that fail to match the convergence criteria i.e PSBR should not exceed 3% of GDP and total national debt should not exceed 60% of GDP.

    I never agreed to Lisbon. I want Britain to leave the wretched EU but until such time as it does the law is the law. So we now have a situation in which 27 states will completely ignore a solem legal and binding agreement that they have publicly entered into. What a pile of poo!! Their word is their Shit.

    • They have pretty much rode roughshod over all of the rules concerning the Growth and Stability pact as well. The Lisbon treaty rules have been shown to be nothing more than words on a page as the EU has simply ignored it.

    • This is far from boring, it is fiscal discipline and obedience to a signed contract.
      The ClubMeds, with whom I generally sympathise, have less attachment to their word than North Europeans.

    • @Kevin: I’ve never read the details of the Lisbon Treaty, but it’s become standard practice across the EU, especially the Latino countries – and equally so in Britain under the last government – to undermine the Rule of Law. Socialism has a very long history of doing that.

      • Problem is as the whole aspect of law enforcement gets more complex
        it gets more costly
        it gets more drawn out and thus more costly

        It’s just likely to be forgotten about altogether

      • Not just socialist countries. The US is the biggest breaker of the rule of law when it suits their purposes and I suspect it will become worse as their position is threatened.

      • @RG:
        True, but you might have noticed that when it comes to law enforcement against the individual citizen for pretty trivial offences, that has become ferocious over the last 10-12 years. The political elites are creating a society with two sets of laws: one for us and one for them.
        That is a fundamental undermining of democracy.
        And let’s not forget that it’s them who draft the laws, so if they don’t achieve what they intend or are too complex to comply with, they shouldn’t pass them in the first place.

      • @oldasiahand: Yes, you’re right it can also happen in countries which are not socialist. OTOH, I can’t think of one ;-)

    • OK, Mary, but what then is the point of the EU? Was it not set up to (a) entrench the very advantageous post-WWII position of the French and (b) spread socialism around the rest of Europe, supporting the poor with the surplus wealth of the rich? A great deal of wealth has been transferred to the southern states from the north and now it’s the turn of the eastern accession countries. Should they be denied the largesse that the south has had in such enormous quantities, and still – for the moment – enjoys?

    • @Mary: if sovereign govts ceased all bank bailouts and let irresponsible banks go down (as they surely deserve), what is your suggestion for dealing with people who have money deposited in them?

      • Sorry to interrupt BT but deposits in the UK are already guaranteed up to £50,000 per account I think.

        It would mean more nationalisations… don’t forget the French banks are all backed by the state anyway.

      • Sovereign govts guarantee deposits (upto a certain limit – say 250k, basis you can afford it if you have more than that in cash in the bank) but they let the bank fail. So the shareholders/bondholders lose but the people who deposited money don`t.
        Historically, if you deposit money in a bank you have a right to expect it to still be there when you want it back. If you buy shares in a bank you have no right to expect those shares to increase in value or even to maintain their value. Likewise if you have bought bank bonds you have no right to expect a govt to guarantee them – although I`m sure a lot of people think that that guarantee is explicitly there.
        Of course if won`t happen like this because it would imply that govts were looking after the “people” to the detriment of the banks, and that can never be allowed to happen ….

      • @Mark: It’s now £85k in the UK. Underlying my previous comment is that I’d like to know the cost to taxpayers of a) taking a very hard line with the banks by letting the weak ones go under, then invoking the £85k deposit protection scheme -vs- b) pouring £billions into bailing them out after gross mismanagement and greed. In Britain we’ve never been given any figures on these two options…that usually means they’re being hidden by government.
        I suspect it all started with Brown when he sh*t himself at the sight of lines of savers queueing up outside banks to pull their money out.

        Same thing applies to the e-zone countries now.

      • @mountainman: many people with large-ish sums on deposit cannot “afford it if you have more than that in cash in the bank” as you think.
        The sums on deposit are often the person’s life savings for use in older age to reduce reliance on the state, or perhaps they’ve downsized their home to liquidate some cash to supplement a meager pension etc.

      • @BT: of course you`re right … I merely used the figure of 250k to try and avoid the situation where speculators pile millions into bank deposits in a “bank in difficulties” on the basis that the govt is guaranteeing it.
        What I wanted to get at was that govts should protect the “people” but not the professional investors and speculators

      • @mountainman: I guess the pols would claim that their bailout actions have prevented the banks from crashing and therefore ‘saved the savers’.
        What they’re not saying is how much ‘saving the savers’ would have cost on its own and to hell with bank shareholders etc.
        One also has to think that if professional investors were allowed to lose big time, that would directly affect pension fund values (that’s our money).

      • @BT:Then we get back to the same old conundrum, don`t let the banks fail because if we do then it is our pension that gets hurt.
        So it becomes a question of risk/reward. Is the reward of finally taming the banks (or at least curbing their excesses) by letting go at least one TBTF bank worth the risk that one`s pension gets hurt?
        I suppose the answer to that depends upon how your pension is constructed.

  3. “On this lastest G20 plan, however, she has remained silent. It could be that she no longer feels strong enough domestically to take on a charismatic and patriotic central banker rapidly turning into some sort of quasi-political pop star.”

    Merkels situation is becoming worse by the day now… her position is now so weak after all the German State elections that she is hamstrung, hence the deafening silence from her over the last week or so.

    Not too mention her coalition partners who are in real danger of disappearing altogether.

    If it is forced through in some way will Weidmann be the next to walk I wonder. The effect of Jurgen Stark quitting the ECB must have done a lot of damage to Merkel.

    I still can’t see how they will get around the German Court ruling though.

      • The EU politicians will ignore it certainly but Merkel can’t afford to unless she wants to pick a fight with the German Supreme Court, her political position is far too weak after all the State election losses.

        Merkel is going to lose her job if she is not very careful… the other members of her own party will not let her drag them down with her.

        Is Merkel really willing to destroy her own career and possibly her party just to kick the can down the road some more.

        Somebody stop her…

      • @Mark: Interesting comments. I think you’re right…she’s getting into a tight corner of her own making.

    • If the Merkel government collapses there is an even more fanatically Euro supporting alternative in the Socialists and Greens waiting to take over.

      The Europhiles will push the whole system to destruction before they accept the Euro has failed.

    • Of course and they are relaible and good payers. The didn’t kill my relatives but their Korean underlings abused my mother in law when she was 13.

  4. There may be, (at last), the realisation within the German politicos, that if Geithners plan is realised, they risk history writing about how they pauperised the whole of Europe. Doesn’t quite chime with thier ideas of destiny. Regardless, there remains a huge, (if redefined), hole in the ‘rescue’ plan. And I see no way to repair it.

    • If the 2 trillion bailout fund actually happens (doubtful) then the French and Germans can say goodbye to their AAA rating.

      It does not matter if it is monopoly money or if they print the real thing, the end result will be a huge debt transfer and burden placed upon the shoulders of the German people… the French are going to be too busy recapitalising their banking system and will not have the cash to contribute.

      If the Germans go for it (madness) then they will essentially be the sole guarantor of the Eurozone.

      This whole situation has gone way past Greece now and the bailouts may have worked if they had done it at the very start… the crisis has now spread and hair-cuts for investors on Greek debt will not help Spain or Italy at all.

      The markets will call the Eurozones bluff just as they did with Greece, Portugal and Ireland.

  5. @Bankrupt Taxpayer

    Merkel is caught between a rock (global politicians and bankers) pressuring her to bail out the Eurozone and a hard place (Her Own Party, Supreme Court and Voters) who have had enough of the southern med countries and the endless bailouts.

    In the end her own self preservation instincts will kick in as it always does with politicians eventually and she will say no more money and mean it, possibly even dropping out of the Eurozone if the situation gets that bad for Germany (which would help everyone).

    Hopefully this will happen sooner rather than later for her own sake, we may be seeing it now as she has been very quiet as of late. With the markets as unstable as they are she would normally have been out saying the Euro is safe and will not be allowed to fail etc etc… the silence from Merkel is deafening at the moment.

    Something has got to give…

  6. We are fast approaching the success( or not) of the Havana 3.The anticipation in 1979 of a government likely to save the UK from terminal decline was met by the successful recruitment of Pavlov(I like mega-priced houses),Garry(I hate the English,and people with top degrees from a serious university) and MarK(I carry on the tradition of my college,we betray our country).Pavlov and Garry know that their political vehicle is toast.MarK is still there,knowing that time is running out,his chance to destroy the UK economy by inflation may be tempered by the prinicipled stance of two Germans,who know a thing or two about inflation.He will go on,the pathetic MPC will give in to ‘more money solves the problem’,but in time he will find that exile(not in Moscow) is still EXILE.

  7. Wolfgang Schauble said concerning the EFSF earlier today…

    “We are giving it the tools so it can work if necessary. Then we will use it effectively but we do not have the intention of boosting its volume.”

    So they are going to do nothing then… they intentionally leaked the option to see what everyone thought about it without making it official… clearly they have been told nein.

    To be honest there are so many countries that have yet to vote on the july agreement and I cant see that passing easily never mind a new EFSF super bailout fund.

    Yet another idea dead in the water… the markets perked up not because it was a good idea but because it was at least “an” idea.

    Back to square one then.

  8. BT
    Tell me, in all your wisdom, with everything dropping like a stone – stocks, gold, silver, property, vintage cars, luxury yachts etc, etc. And even though MONEY is what everyone is so short of, but which has never been cheaper in this extended period of money shortage, and market manipulation.
    What is a guy to do when he is fully cashed-up – where does he go from there?

    • In short…I don’t know! A major reason I read this blog is to read some of the valuable thought-provoking ideas/comments from John & other people.
      If things start to look bad, stock up on non-perishable foodstuffs. I have a bolt-hole to go to, far far away, and I’m making precautionary plans in case I need to go there if UK/Europe descends into political chaos and a strong man emerges and closes the borders.

      I have spent my life in corporate business (not financial business or the City) …but ISTM we are currently in a situation of searching for ways to protect whatever wealth we might have accumulated from the twin evils of government-sponsored hyper-inflation and the banks closing their doors and leaving us penniless. It has occured to me that if that latter happens, then the govt will have to print the money to honour the Deposit Protection Scheme and that will probably help to trigger hyper-inflation – if it’s not already happening due to more QE.

      I said to a friend the other day that if the banks close their doors and switch off the ATMs (meaning I have no cash) I will have no choice but to ransack the supermarket for food “whilst stocks last”. I judge by that time I won’t be the only one doing it.

      • BT
        What makes you think things will be any better in your ‘far far away’ bolt hole? And, how are you going to get there?
        Of course, you could be describing heaven – I do hope you’re not planning something that drastic!!

      • @Mike: every plan has its risks…
        In my case, about 6 months ago I funded the purchase of a property in my far-far-away bolt-hole (24hrs door-to-door). I’m now looking closely at the currency wars going on between UKP/USD etc -vs- the local currency in my bolt-hole with the possibility of shipping out enough cash there to live on in perpetuity. Meaning that much of my cash won’t be in the UK/EU banking system if/when it comes crashing down and the banks close the doors. Nothing set in place at this time.
        Getting there? Well, since I can travel at virtually a moment’s notice, I hope I’ll be smart enough to get on a plane before a strong man takes over and closes the borders or imposes an Exit Tax!

    • Diamonds
      Platinum

      Last resort for people with a lot of money and no safe haven to put it is generally Sovereign Bonds…

      UK/US and Germany are only offering around 2% returns over 10 years… yet they are going like hot cakes because they are trusted and a safe bet even though you won’t really make any profit, but at least your original investment will be safe.

      Obviously keep away from the Club Med Euro bonds even though they are offering good returns… they are only offering good returns because no one will buy them.

      At times like these investors are not bothered about getting good interest rates or yields their only concern is finding a safe place for their money.

      The biggest problem for those who are filthy rich in times like these is finding safe places for their money… it is not as easy as you may think.

      Most investors diversify their portfolios and have a mix of shares, bonds, property, metals and currencies. You can make a lot of money in share dealing at the moment with a market as unstable as it is right now (some shares can change value by 10% in a day – big money to be made if your smart and you time it right), you can also get your fingers burned too.

      For instance gold dropped the other day by $100 in 24hrs because the banks were selling gold to build up their currency reserves in case Greece falls over and starts the dominoes falling, if you were a betting man you could go all in and the price could rally in a week and you would make a nice profit.

      Its a risk and a judgement call.

  9. Mike,ah I am not a IFA or a snake oil salesman,so your guess is as good as mine,’fully cashed up’,you got that one right,inflation v the yield on ‘risk free assets’(not very enjoyable),well it is similar to 1974,be patient,there might be a market event(a panic sell off),but one or ten multinationals can service their debts and pay dividends ,year in year out,and increase them ,which is better than Clubmed.The major auction houses are very twitchy about provenance,fear is everywhere,but the man with cash has got it right.

    • Hell. That’s one of the most explosive developments in this farce.

      It takes the top German constitutional judge to remind Merkel that she lives in a Western democracy, not the DDR.

      Of course we in Britain don’t ‘ave one o’ them there constitution thingies. Imagine that.

      This is set to heat up…

  10. Is it time for our Government to assess the worst case scenario regarding the Greek debt crises (and looming French + others banking crises) and make a public statement of the possible effects on Britain’s banks if it all goes south as looks increasingly likely?

    The DT article posted by MG above, clearly reports that creating a €2 trillion bail-out fund with German money would be a violation of the German Constitution, according to their top constitutional judge who insists that authority from the people must be sought first. Imagine that!

    Merkel must be pooping her knickers and Sarko going bananas.

    IMHO this is a very serious development for the future of Greece, the euro, the e-zone, the EU and all the banks involved.

    Tin foil hat time methinks…

    • @BT

      As I have said before I can’t see how they can get past the Supreme Court ruling, the 2 trillion bailout is not happening Wolfgang Schauble said so yesterday… They leaked the rumour to see what the Judges thought and they have their answer… nein.

      In a few days time the Bundestag will vote on the July agreement and it is by no means a certain victory for Merkel, the comments made by the Judge will cause many loyalists to switch their votes to nein. It is all unconstitutional and the Judges have actually come out and said it, this will embolden the rebels no end.

      I have no doubt that every government has by now run the numbers to see what would happen when the dominoes start to fall, in my opinion the true fallout can’t be so easily worked out as events will move very quickly just like Lehman Brothers in 2008. I am pretty sure of one thing France will lose its AAA rating and the yields for Italy and Spain wil become even more uncomfortable than they already are.

      This morning the Greeks held a press conference stating that they would hit their targets and buckle down blah blah blah… no one believes them they want to get their hands on the next 8 billion and then they will default, I can’t see them staying in the Euro either what would be the point.

      • Quite so. Oddly, the German constitutional situation described in that DT article is not being reported by other MSM afaics. And this morning the markets are climbing north, suggesting that they are assuming the €2 trillion leveraged bailout is on track…
        I still think our Govt should make a public statement about the situation of our banking system to headoff growing unease and possible run on our own banks should the sh*t start flying off in all directions…

  11. It looks like this is close to the last opportunity for the uk gov to establish new local banks [secured on local taxpayers?] capitalised by local shareholders with matched funding from the centre ready to pick up the peices from the deflation of the spume of current capital values, and the consequential collapse of the hollow majors.

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