By John Ward
Victory for Bankfurt over Berlin as Weidmann retaliates on firewall question
Yesterday afternoon’s decision by the German Bundesbank to refuse acceptance of Greek, Irish or Portuguese sovereign/bank bonds has dealt a blow to the Eurozone which few informed observers think it can survive. With the help of sources, The Slog digs into what’s really going on here.
As The Slog has always maintained – and Parisian sources have consistently affirmed – there are really three Germanies at the moment: Merkel Germany, Schauble Germany, and Banker Germany. Banker Germany has been led for several months now by Jens Weidmann, the Bundesbank President; and as the Slog’s Bankfurt Maulwurf has been alleging for weeks, this last schism’s power is in the ascendancy. Schauble Germany consists of the Finance Minister and some of his aides: these are the leading players who have become increasingly pessimistic about ClubMed’s chances, while coming under more and more pressure from parts of the Bundestag and the Karlsruhe consititutional Court. Merkel Germany consists of Angela Merkel and the woefully uninformed German electorate.
Despite widespread scepticism earlier this month, The Slog also reported a detailed US-inspired plan to ‘amputate’ Greece as a source of debt contagion after close of business on 23rd March. I later added to this further detailexplaining that the US felt ‘double-crossed’ by Germany, having given the ECB’s Mario Draghi the dollars to underpin eurobanks, but not seen Brussels ‘deliver’ by pulling the plug on Greece. What’s now becoming clearer is that Washington hugely underestimated both the power of Jens Weidmann, and the rift between him and the ECB. They weren’t double-crossed: the State Department had its lines crossed.*
The EU in general – and very badly shaken markets – now face the reality of a Spanish situation getting worse by the day; an effective civil war inside the EU’s biggest player Germany; and Greek bonds that have been rendered worthless. As Greek newspaper Ekathimerini reports this morning:
‘The development is very serious as it means that even the new bonds issued by Athens to replace the old ones after the private sector involvement in the haircut will have too low a value. Already their difference in yield compared to German bunds, known as spread, has grown by more than 200 basis points in fewer than 20 days, climbing to 1,940 bps….the credibility of the new bonds issued is no different to that of the old ones they have replaced. What is more, Greek banks will need to gradually seek funding from other sources and not the Eurosystem, which is not at all an easy proposition.’
Late yesterday evening I got this comment from the Bankfurt Maulwurf:
“As I said, by the wintertime there will be no eurozone as we know it. Merkel is now increasingly alienated. My guess is that, based on her history and personality, the Chancellor will switch sides.” [ie, and privately accept that FiskalUnion is doomed with any ClubMeds inside it].
The Slog’s regular and reliable source also disputed the main suggestion in last night’s Wall Street Journal piece, in which the Murdoch-owned paper noted that ‘Jens Weidmann reacted strongly after the ECB relaxed collateral rules for its second three-year loan tender in February. The looser rules allowed smaller banks to take part in the loan operation.’
“Of course,” he told me, “Herr Weidmann is opposed to such a crazy idea, but today’s aim was really to fire a shot above the Chancellor’s head. The Bundesbank’s management – and most of my colleagues – believe that the so-called firewall boost is madness. Not only will it not work, it is throwing very good German money after very bad ClubMed debt. We must hope that Frau Merkel’s head will now return to earth from the clouds.”
Earlier this month, The Slog ran a lengthy piece alleging an ultimatum given to Merkel by Frankfurt bigwigs.
My favourite Parisian diplomatic source also adds some colour.
“Yes of course Weidmann is dumping the risk back at the ECB and delivering a serious snub to Signor Draghi. But as you might say in Britain, the German Central Bank has placed an ASBO-tag on Angela Merkel. She is a very stubborn woman, but Jens Weidmann is a very patriotic and resourceful banker. This is a very bad development for the Eurozone.”
Market contacts I’ve managed to find this (Saturday) morning GMT responded similarly. “The eurozone was dead in the water anyway,” said a Madrid-based dealer, “Weidmann just torpedoed a dead duck. This means there’s no longer a debate about whether the duck’s dead or not.”
“I think what we’re seeing here is open warfare on several fronts,” said a leading UK wealth manager, “member State banks batting the ball back to Draghi, Frankfurt starting to reel Berlin in, and everyone scrabbling around for an exit plan. Another way to describe it, of course, is to say it’s every man for himself now. We’re expecting the Spanish bond market to need massive ECB support come Monday. We’ll see, but that has to be the most likely outcome”.
Anyone predicting the order of events from here on would have to be mad or dumb. Later today I hope to talk to some US sources, but in the meantime, the reaction to Weidmann’s move among the American the media set has been muted. More broadly, neither Reuters nor Bloomberg flagged the development, and the FT – ! – doesn’t mention it at all so far online.
There are times when even an anti-conspiricist like me has to wonder about the Anglo-American business MSM, and whether there are some things they just won’t print. Rupert Murdoch loathes the EU and would do anything to sink Britain – hence the WSJ coverage. But most of them seem at times to look the other way when this kind of stuff happens.
*Since March 23rd, the Athens Government has twice postponed the closing date for English Law bond-swap involvement – a fact barely reported anywhere in the MSM. It was always my suspicion that the English law liability would’ve represented one of the many rationales cited to amputate Greece on that day. During this period, the Greek government has also illegally raided the bank accounts of Greek hospitals and Universities in order to raise the money required to settle some English Law debt. The story (later confirmed in the Greek media) was first posted here. I have yet to see it covered anywhere in the rest of the EU.