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Sunday, January 15, 2012 6:17 PM

Merkel Denies Need for EFSF to be AAA Rated; German CEOs Ponder Dumping the Euro for a "North-Euro" or Deutschmark; Schaeuble Rejects ECB as Lender of Last Resort

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With every passing day, there is increased chipping away of support for the Euro. Please consider Linde CEO says Germany should mull euro exit

Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde told German weekly paper Der Spiegel.

"If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW and head of Jaguar and Land Rover.

Asking Germans to pay more than 50 percent taxes to help fund other euro zone countries will erode the will of the German electorate to support rescue measures, Reitzle said.

Of course it would lead the new currency - Deutschmark, North-euro or whatever it is called - to appreciate in value. But it would be by a lesser amount than feared," Reitzle said.

"In the medium term Greece needs to exit. And the writedowns on Greek debt will not be between 50 to 70 percent, but in the end will be written down by 100 percent," Reitzle said.
Merkel Denies Need for EFSF to be AAA Rated

Following the rating agency downgrades of numerous European countries especially France and Austria (please see S&P Says Eurozone Policies Fall Short , France at Risk of Further Downgrades for details), close to 75 percent of the burden to ensure the euro bailout fund EFSF retained its AAA rating is on the back of Germany. Prior to the downgrade, German backing was 40%.

True to political form, Merkel downplayed the significance of the downgrade with a statement "I was never of the opinion that the EFSF necessarily has to be AAA".

Well it certainly doesn't "have to be" but what interest rates does one want, and how much German backstop does one want? Those are the critical questions.

Pressure Mounts on Merkel

As a result of the downgrades, pressure on Merkel mounts in numerous ways.

Der Spiegel discusses the situation in France Downgrade Creates Pressure for Merkel
Following the decision by rating agency Standard & Poor's to downgrade the ratings for nine euro-zone countries, pressure is likely to increase on Germany, the country long viewed as a model during the crisis, but also the one that holds much of the money that is needed to solve it.

In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but experts in the country fear that Berlin's contributions to the euro bailout will have to be considerably greater than initially planned. And Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) said the downgrade of the nine countries will increase pressure for all the euro-zone countries to solve their budget and debt problems.

Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Merkel's junior coalition partner, said he felt his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P. He said the downgrading was likely to have direct consequences for Berlin. The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that "Germany would no longer just have to carry 40 percent, but close to 75 percent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating."

He said the current German guarantee of €211 billion would no longer be sufficient in order to achieve the volume of aid that had been originally planned. "Over time, that will also impose a burden on the German rating," the FDP politician warned, saying that the "socialization of losses" through the bailout fund could not go on forever.

But during her press conference on Saturday, Merkel sought to downplay worries about the ratings loss. "I was never of the opinion that the EFSF necessarily has to be AAA," Merkel said. "AA+ is also not a bad rating." She added that the "work of the EFSF will not be torpedoed" by the downgrade.

In France, the euro-zone's second-largest economy, the opposition has taken the downgrade as an opportunity -- coming as it does three months before the French go to the polls to elect their next president -- to sharply attack President Nicolas Sarkozy. Francois Hollande, the Socialist Party's (PS) candidate for president, accused the government of failure. "Nicolas Sarkozy declared the triple-A rating to be the goal of his politics and also a condition for his government," the politician said during a press conference in Paris.

S&P now considers the outlook to be negative for 14 countries, even if some managed to escape a downgrade this time. Besides Germany, Slovakia is the only other country in the euro zone with a stable outlook, according to S&P.
Schaeuble Rejects ECB as Lender of Last Resort

Bloomberg reports Schaeuble Rejects ECB as Lender of Last Resort.
German Finance Minister Wolfgang Schaeuble renewed his rejection of joint euro region bond sales and said giving the European Central Bank the role of lender of last resort wouldn’t calm markets permanently.

“If the central bank finances government debt, it’s a modern form of the old bad habit that if the government doesn’t have enough money, it prints money,” Schaeuble said today in Berlin. “If we start doing this, markets will calm down for some time. But then they realize that the European currency is not a stable currency” in the long run.

Selling government bonds jointly in the euro region isn’t a solution to the euro region’s debt crisis because it would mean that governments “can pile up debt without being liable for it,” Schaeuble also said in Berlin after attending the screening of a documentary on the region’s woes.

“We wouldn’t solve the problem,” Schaeuble said, referring to joint bond sales and relying on the central bank to finance state debt. “The countries must reduce their debts. We can talk about the speed at which this has to be achieved.”
Joke of the Day

While I certainly agree with Schaeuble regarding Eurobonds. I also agree that "giving the European Central Bank the role of lender of last resort wouldn’t calm markets permanently".

However, Schaeuble comments are tantamount to the "joke of the day. The ECB is without a doubt already the lender of last resort if not the lender of "only" resort.

Were it not for the 3-year LTRO with the ECB accepting dodgy collateral for cash, interest rates in Spain and Italy would be soaring. Instead, Germany is on the hook.

Mike "Mish" Shedlock
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