Germany To Leave The Euro?

The Market Ticker ®
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I don't usually write on rumors, but this one simply will not go away.

Germany is rumored to have ordered printing plates to resume printing Marks, and is intending to walk. This does make sense, although the Germans would have to find a way to shield their banks from the impact of a massive shift off the Euro and into the Mark by Germans, which would spike the Mark higher and positively trash the Euro's value.

The usual answer to "why they won't" is that the Mark would become ridiculously strong and that would kill Germany's export industry, which being goods based (rather than the faux "export industry" that is often mostly services) would get plastered. The core of most commentators' thesis is that this fact would preclude Germany from doing it.

But here's the problem - playing the bailout game is a tax exactly identical to the impact of that stronger currency, and the bailout game costs you the decision-making power you retain when you are the one in control of your own destiny.

The German people are tired of the crap and with good reason. They should not have bailed out Greece in the first place; they effectively rewarded cheating, as Greece was caught cooking the books. Rather than prosecute the banks involved and yanking their charters, along with saying "No Mas!" they knelt down and performed an obscene act - more than once. There is a political limit to how far you can go with these acts before the people act in whatever manner is necessary to put a stop to it, and the Germans have a long and painful history of what popular tolerance of political stupidity leads to.

I think there's at least some credibility to this rumor. I can't put a percentage on the bet, but it's not pure tinfoil nonsense. Whether Germany actually goes ahead and does it likely depends on whether there is a further contagion - and I think there will be. In fact, as I noted yesterday in an interview (to be published as a podcast next week) I have a nasty suspicion that Europe will ultimately "resolve" this problem the way Europe has in the past - via the business end of a bunch of hot lead-chuckers.

That would be disastrous but not surprising, given historical precedent.

Here's the problem, when you get down to it - there comes a point where further bailouts have to be refused, simply because there's no money to fund them. I don't know exactly where that line is, but I do know it exists. Believing it doesn't is the stuff of fantasy, and yet that's exactly what the "Troika", the IMF and others are all running.

The market says "BS!" to all of this; the sell-off in the equity markets is bad, but the implied forward view looking at high yield credit is far worse, and that looking at credit-default spreads is even worse than that. The latter on a number of institutions are showing the sorts of numbers that immediately preceded Lehman's failure, implying the potential for a "no-notice" liquidity seizure.

If it happens, and if it does it is likely to come almost without warning if not literally without warning, Germany would find it very expedient to leave the Euro.

Note that the treaties that formed the Euro left no means to expel a misbehaving "member." But there's no way to restrain a nation from deciding to quit as opposed to being expelled.

Many believe that Greece will leave instead. They may, but only when it's clear that there will be no more "bailouts" forthcoming. Their departure would destroy their banks instantly, unless it was coupled with a simultaneous "by declaration" re-denomination at par of all Euro-denominated debts in the nation into the Drachma.

That, incidentally, is not beyond the realm of possibility. What other nations in the Euro would think of it, and the sort of tectonic reaction it would generate, is another thing entirely.

I think we're weeks to months away from a catastrophic failure somewhere in Europe, and the slowdown in Asia is much worse than is being reported. Any belief that we're going to avoid the repercussions of these events is pure folly.

That is a light you see down the tunnel, now that we have walked in well over a mile from the mouth.

Unfortunately that light it is a train and there is no chance we can run the other way fast enough to avoid being flattened.