Goldman Sachs, in estimating the impact of tomorrow's LTRO, lets one slip, namely the fact that despite popular German expectations that European bailouts occur at the ECB level, and Germany is fairly isolated from what happens in Greece (which as of today no longer stays at the ECB, but shifts right through to the Bundesbank) thereby reducing the risk of runaway debt inflation, the true price to Germany is substantial to quite substantial. €1 trillion to be precise. Which just happens to be 40% of German GDP...
To wit:
The ECB’s second 3-year refinancing operation (LTRO) kicks-off today, with results announced tomorrow at 10:15 GMT. Around EUR200bn is expected to be drawn from (mostly small-medium) banks in the seven countries that have requested loans to be pledged as collateral through the respective national central banks (the number is obtained by applying a 2/3 haircut to a pool of EUR600-700 bn eligible credit claims). The consensus figure for the entire operation is around EUR500bn, similar to the size of the first refinancing. A higher headline number would have positive first order implications for broader markets, indicating that ‘excess liquidity’ is available to Euro area depository institutions. The focus will then shift on where such liquidity will eventually be deployed. Data for January released yesterday showed that credit to the Euro area private sector has stabilized, but not recovered after the sharp decline at the end of last year.Staying in the Euro area, the vexed issue of the size of the so-called ‘firewalls’ remains unresolved, and will likely come up again at the Euro leaders summit on Thursday and Friday (March 01-02). The debate crystallizes the tension between ‘financial stability’ and ‘moral hazard’ that has characterized the European sovereign and banking crisis right from the start. Calls on Germany and other core states to combine the lending capacity of the EFSF and the ESM and thus provide a bigger protection against tensions in Greece are increasing. But with peripheral spreads in retreat, largely thanks to the ECB’s ‘all-you-can-take’ term funding operations, the fear in some quarters is that of removing incentives for the peripheral sovereigns (and banks) to continue deleveraging. Germany is the country that has pushed the most for PSI in Greece in an attempt to foster future market discipline, but is also the one that has the biggest stake in conditional aid programs to the periphery and seen its ‘target 2 imbalance’ vis-à-vis the EUR periphery reach almost EUR 1trn on the latest count.
So how long before fake German indignation turns real: €1 trillion in sunk PIIGS costs, €2.5 trillion, or 100% of German GDP? €5 trillion?
Or will the perpetually dangled carrot of an insolvent welfare state keep doing to trick to keep the debt slaves in their stupefied trenches in perpetuity, in a state of dazed zombification, punctuated by the occasional showing of Football (either the North Atlantic or European version).