BUNDESBANK v ECB: Round 13
German power is about to prove decisive.
By John Ward: Here we are again, back at the Target 2 system that allows peripheral
eurozone States to get a stealth bailout by having huge outstanding
liquidity (loans really) from the ECB, while Germany has equally huge
liquidity (deposits really) at the central bank. Target 2 was originally
designed purely as a monetarist transmission system. But national
ClubMed central banks have perverted this by simply drawing on it, up to
but not including putting anything back.
Controversial (but very smart) German economist Hans-Werner Sinn
continues to argue that “It is as though the ECB were acting as a
purchasing agent of German savings, which it then services and
distributes to the crisis countries at whatever conditions it deems
appropriate”. Sinn represents Bankfurter concerns, and for years he has
been rubbished by CDU spokespeople/Berlin bureaucrats who did the “Yes I
know it looks like a turd Tsunami heading our way, but it’s really only
accountancy of no significance”. Clearly Sinn was and is on the ball:
and in the New Germany that has risen from the Bundesrepublik elections,
he is now in fashion rather than out on the wacky moons of Saturn.
Germany and Nordeuropa have been outnumbered on the ECB board since
May 2010. The ECB board’s actions since that time are pretty clearly at
odds with article 125 of the EU treaty, by having created a giant volume
of public credit and guarantees in favour of ClubMed and other
strugglers. A Frenchman and then an Italian have, in the final analysis,
fiddled the system to stuff the German Weidemann. Trichet and Draghi
used the system to their advantage, but now Berlin and Schäuble are on
Weidermann’s side….and on the ECB’s case.
Let us suppose that the inevitable does happen in southern Europe:
Greece defaults in March, Italy stays as she is – a car in neutral,
sinking into the quicksand – and Spain’s empty banks get themselves into
trouble on one of seventeen perfectly predictable dimensions. The
write-offs will, I would argue, be far more than the half a trillion
euros of capital that underpin the ECB….and I haven’t even included the
French 2cv heading for the wall at top speed.
Germany’s Target2 credit with the ECB was at one time around 800
billion euros, an increase of over 200% immediately after the eurocrisis
began.
But what’s to stop Berlin simply taking its ball home? The truth is,
it’s already happening: the stock of German banks’ claims on peripheral
Europe has fallen to €300 billion.
And now look at what Germany has clearly laid down as the law on
Greece. Rehn has said emphatically that Antonis Samaras the Greek PM
will not get his promised Christmas debt relief. Nobody has a solution to this, so what happens?
The answer is “anything”, but this time it certainly isn’t going to
be “nothing”: because Mario Draghi may have the ECB votes, but a
strident Germany has far less cash at risk than before.
What we have here is a game of poker: Draghi is gambling that Berlin
will do anything to keep Greece from defaulting. Schäuble and Weidemann
are gambling that a threat to start taking German funds out of the
Target2 would scare the crap out of Draghi.
There are even hawkish bankfurters who say “Get what money we can out
of Target2, and let Draghi’s bank go under – then we take over”.
Go back to Germany’s banking union diktat:
it makes a deliberate fist of smudging and blurring the Sovereignty of
the EU even further. This to me is a further sign that Berlin will play
hardball, saying simply, “We will take over the EU’s finances in
Frankfurt…but not until the ClubMed dung-heap is cleared away”. From the
start, Berlin has refused to get lumbered with the bill. The Germans
are saying, “No taxation without domination”.
Whatever commentators may say at the moment, in the end those who
invest in the eurozone would rather have solidly boring German money
management than the slippery money-printing bondholder-subordinating
Draghi. The German High Command knows this. So does Mario Draghi.
Yesterday, ECB executive board member Peter Praet told the media, ““The balance-sheet capacity of the central bank can also be used. This includes outright purchases that any central bank can do.”
My riposte to this would be, “Not without German cooperation you can’t, matey”.
The future’s tight. The future’s German.
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