By Consenso del Mercado | After the difficulties Germany experienced in placing its bonds last week, it seems to have somehow relaxed its official position and be willing to let the ECB buy the required massive amounts of sovereign debt, even though under certain conditions. In this regard, Spanish Bankinter analysts argue that Germany is the country that would be the least interested in a euro breaking down. Here´s why.
“It is possible that Germany has tried to strain the situation to the maximum acceptable, to the point that it would allow to implement the legislative reforms that it considered necessary (in terms of modification of treaties, fiscal integration, centralisation of control of public spending, etc…) before concede one iota in the measures that markets were demanding. The main claim was to give the ECB the ability to make purchases of debt in the market without the limits of the current Securities Market Programme, currently in force, or the issuance of Eurobonds.”
When adopting such an inflexible position, the risk is that (our emphasis)
“the situation can get out of hand, pushing countries like Spain and Italy, which initially only have liquidity problems, on a path of no return toward insolvency. This could even mean the break down of the euro. In our opinion, there would now be around a 25% chance of this occurring.
“We believe that Germany will finally manage to impose a series of ‘tolls’ or ‘waivers’ to other EMU countries before giving up on some of its positions, for several reasons. The first is that Germany itself is the one least likely to benefit from a break down of the euro. If such a situation were to come about, its currency would appreciate significantly, negatively affecting its exports: both exports that are destined to countries outside the EMU (because the other EMU countries’ currencies would depreciate, which would then place them in an optimal position to compete against German exports), as well as exports Germany makes to the rest of the EMU, which are 40% of the total.”
The latter would be doubly affected, due to the loss of competitiveness and the lower purchasing power of its customers.
“Therefore, in this scenario, its expected economic growth would vanish. Additionally, Germany is a creditor country for the rest of the EMU, and if the Euro breaks up, those debts would then be re-denominated in other currencies. The effect of this for all German creditors would be the same as that of a default. And finally, because in the end Germany is practically the only country in the euro area which continues to enjoy the main advantage of the euro: to have at hand very cheap financing. Too much to lose.”