Why Germany’s “Bond Auction Disaster” is Actually Positive

This morning we woke to news that Germany failed to get bids for 35% of the 10 year bonds that they offered for sale overnight. This is important because Germany is the strongest nation in Europe and if they have trouble raising capital why would alone want to touch the debt of other countries such as Italy and Spain.

Now while the mainstream media are harping on about this being the start of a flight out of the Euro Zone and another step towards financial implosion I take a different, more positive view. Over the last two years Germany has felt largely “immune” from the disaster. Yes, they have been annoyed at having to bail out their fellow Euro Zone members and there were/are concerns about a wider economic slowdown throughout Europe but other than that, the fear of debt (and the inability of Germany to raise it) had not gripped the German people or their Politicians.

What the failure of last night’s bond auction shows is that all debt, regardless of who issues it, is being treated like the plague. Germany can no longer afford to see the inaction that has gripped Europe continue for too much longer otherwise they will be dragged down with the rest of them. And herein lays the positive. Germany now has no alternative but to fix this mess and fix it swiftly.

Previously everyone had been negotiating to try and limit the “damage” (or liabilities) to their own country, but if Germany is under pressure, everyone is under pressure and any attempt to limit damage or negotiate around the issue is a moot point. I now expect the European leaders will get together and push forward with a new, stronger and more decisive mandate. I expect this will be a combination of austerity measures (to bring government spending under control) followed by a massive quantitative easing program that will start from the European Central Bank and filter funds down to the individual countries.

This will serve two purposes. Firstly countries such as Spain, Greece and Italy will be forced to bring their budgets into surplus, or at least not run a massive deficit, and the massive printing program (which in layman’s terms is issuing bonds that are then bought with printed money) will place the debt with the ECB rather than at the individual country level. Sure it is a bit of phoney accounting, a bit like ignoring the fact you have a massive loan owed to your mum and dad, but on the surface it looks like the debt burden of each country is significantly less.

Sure we all know it is not a complete fix to the problem, but perhaps it can bury the issues long enough for the European economy to recover and individual countries strengthen their balance sheets.

How To Commit Political Suicide

Last week everyone was celebrating the Euro bailout package, stocks where rallying and everyone was appeared to be happy again. Obviously nothing can go up in a straight line, so something had to shake the boat and it happened to be some comments/policy moves by the Greek Prime Minister, George Papandreous.

In what only can be described as political suicide, George Papandreous announced that he would put the European Bailout Package to a Referendum. Now if you have kept even a passing eye on the European situation you would have seen the Greeks take to the streets at every opportunity. They are clearly disgruntled about the austerity measures they face and what they deem “unfair” treatment. Even though it is their country that is burdened with debt and despite the fact that if they were outside the Euro they would have been cut off long ago.

Clearly with such negative sentiment from the Greek people there is a STRONG chance that they would vote NO to the European Bailout, which would have a disastrous impact on the stock market and the chances of a global economic recovery. What I think George Papandreous is hoping to do is to “show” his people that he is still working for them and believes in their support. Unfortunately such a strategy is fundamentally flawed in this situation and anyone who thinks the average Greek has even a passing interest in the financial fortunes of the rest of the world is mistaken in my opinion.

Luckily for the rest of Europe and the World I don’t think the Referendum will get up. I can already picture German Chancellor Angela Merkel and French President Nicolas Sarkozy blasting Papandreous over the phone and putting him back into his place. They have simply come too far to let this political light weight ruin their plans.

Further improving the chance that the Referendum will never get up is the fact that the decision to hold a Referendum must first be passed by the Greek Parliament and overnight the Socialist Pasok Party withdrew from the Papandreous’s coalition leaving him with out 152 seats out of 300. I.e. he has only a very very slim margin and if another one or two cross the floor or jump ship then good-bye Referendum and good-bye George Papandreous.

Don’t be surprised to see him gone by the end of the week in my opinion.

You can read more on the story at Bloomberg.