Germany Cries: "Europe Is Coming For Our Money"

Greece Promptly Obliges

by Tyler durden

"Greece is an exception in the Euro Zone" - Angela Merkel, December 9, 2011

"Exception from ESM Seniority only applies to Spanish aid" - Angela Merkel, June 29, 2012

It took about a year, but finally Germany, with a little assistance from Merkel on Friday morning, has figured it out. And is now blasting it on the front pages of its various newpapers:

Europe is coming for our money!

What else does Die Welt say:

When economic historians in a few years determine the turning point at which the euro zone turned into a debt community, they may refer to the last Thursday night. In those dramatic hours when Angela Merkel after massive pressure from Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy buckled - and agreed to an agreement whose scope is now very difficult to estimate.

Specifically, what is now painfully clear to everyone in Germany is that if indeed Merkel's declarations over the past few days are to be taken at face value, then Germay has just lost control over European supervision: a topic very near and dear to all Germans' heart, as up until this point money would be handed out only in exchange for conditionality. A move whie Welt calls a paradigm shift: "To date the Germans insisted that the €-aids come equipped with shackles. Money was always associated with reform programs that were monitored by the Troika of the EU, European Central Bank (ECB) and International Monetary Fund (IMF)." That is now no longer the case. At least according to conventional wisdom:

Precisely for this reason were countries like Portugal and Ireland long afraid to apply for assistance. Now dipping into the bailout pot will be far easier... The federal government has always stressed that any bailout will come with strict conditions. Now all has changed, partly because of pressure from the financial markets. Italy and Spain struggling with risk premiums at record levels. So far, however, they refused to implement emergency measures. That could now change. Monti has already cheered: "the Troika will never come to Rome."

Die Welt may be on to something: while in the case of the Spanish bailout, the European action opened the door for proactive demands for future assistance, what happened last week has also activated the retroactive lever, and the cries for equitable EFSF/ESM treatment (where there is no seniority for bondholders despite Citi's clear explanation the EFSF and ESM will always have implied seniority over other private sector bondholders no matter what promises politicians throw around) will now come from all the other countries bailed out by Europe. Because what kind of union is it if among the countries in distress some are more equal than others. After all, first it was only Greece who was an exception. Now it is Spain. Who will be the next exception?

But before we pretend to even answer that rhetorical question, we already know how long it took Greece to demand the same treatment as that offered to Spain: 24 hours.

From Kathimerini:

Athens to ask for EFSF deal to apply to Greece, too

The government is considering to ask for the European Council agreement of Thursday for banks to get direct funding from the European Financial Stability Facility (EFSF) to apply to Greece, too, even though the recapitalization of local lenders was agreed to be included in the state’s bailout agreement.

The issue was discussed, according to reports, during a meeting at the Prime Minister’s residence in Athens on Saturday evening, ahead of the visit of the representatives of Greece’s creditors from Monday.

And since in Europe now every beggar is empowered to be a chooser, there is no stopping how much Germany will have to pay out of pocket to keep the insolvent ones content.

Main opposition leader Alexis Tsipras urged the government on Saturday to press for local banks to benefit from the new system of direct recapitalization from the EFSF, or threaten to veto the European Union’s Treaty for Stability Co-ordination and Governance and refuse to accept the visit of the creditors’ inspectors in Athens.

Expect many more demands from Ireland and Portugal next. Also expect many more and far angrier headlines out of Germany.

All of this means, that as we calculated last July, with Germany no longer able to kick the can, Merkel will soon have to front well over 30% of its GDP and likely over 50%, just to keep the Eurozone alive. it also means that, as we said last July, spreads of core European bonds will soar in a great compression trade where the PIIGS become the core and vice versa, an outcome that will anger Germany even more as it bring the implied outcome of Eurobonds without Eurobonds ever having been activated.

There is however a catch: earlier today we speculated that Merkel's move was merely one that puts the Constitutional Court, and thus a broad referendum, in action. Already numerous parties are demanding that the highest court scrap the ESM as it is both undemocratic and unconstitutional.

From Deutsche Welle:

The European Stability Mechanism (ESM) and the Fiscal Pact have been approved by the German parliament. But thousands of Germans have joined forces to take legal action against these measures.

The Euro Stability Mechanism's capital stock of 700 billion euros is intended to provide a buffer against the convulsions of the euro debt crisis. The 17 signatory states will each pay a proportional amount into the ESM - irrevocably and without restrictions - or set the money aside to be handed over, if required.

The signatory states came to an agreement on the ESM because, as is stated in the treaty, they are "committed to ensuring the financial stability of the euro area".

But opponents say that this should not be done at any cost, and using any means available. Dissenters are calling for more democracy, and there are a lot of them. More than 12,000 German citizens have joined "Mehr Demokratie" ["More Democracy"], the "Alliance for Constitutional Objections to the ESM and the Fiscal Pact".

They plan to file suits with the German Constitutional Court in Karlsruhe against the instruments being deployed to save the euro. Christoph Degenhart, a Leipzig-based expert on constitutional law, and Herta Däubler-Gmelin, a former federal justice minister, are spearheading the alliance, which also includes some of Germany's smaller political parties.

Another prominent critic is Peter Gauweiler, a parliamentary representative of the conservative Christian Social Union who has experience with lawsuits against euro bailout funds. He is fighting the bailout on two fronts: with a constitutional complaint, and with legal action against the federal government. He says, to date, parliament has not discussed the bill because important passages on the ESM are missing.

The Left party has launched a similar action against the government, and its delegates have also lodged constitutional complaints.

Also as we reported earlier, both Schauble and Weidmann would be delighted if things get to the referendum stage. And in the aftermath of last week's massive optical loss for Merkel, so will she. If it indeed gets to a referendum, Mario Monti may be far less exuberant with the outcome.

However, assuming that there was no grand master plan behind last week's decision, here is, once again, our math from last July showing just how much of Europe's bailout funding Germany has just footed. Keep in mind the context then was just Greece, as Italy and Spain were both "safe", now that is no longer the case. What hasn't changed one bit is the logic behind the amounts that Germany will have to backstop between Italy and Greece. To wit, from over 11 months ago:

• An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This number is even bigger now.

And what is truly hilarious is that all of this was already at the forefrunt of debate last summer, when the EFSF was once again the bailout ex machina, only then the world and capital markets were a little bit smarter, and realized that there was simply not enough cash to cover the funding needs of both countries. This in turn led to the whole 3x-4x leverage debate that would bring the EFSF to €1 trillion: a plan which was scrapped some time in October and promptly forgotten once it was deemed unfeasible.

In other words we are right back where we started one year ago! Next up: cue the debate over how to increase the funding ot the EFSF/ESM bailout complex. Just like last year. And cue the 3x-4x bailout fund leverage expansion discussions for August-September 2012, once again in carbon copy replica of 2011, all only to be quickly forgotten. Because institutional memories sure are short. And because there is just no more money left.

So for all those who have forgotten last year's full mathematical analysis (because math still trumps politican lies and empty promises any day), here it is. All over again.