Bundesbank has announced that it’s killing the Euro. No, they didn’t put it that way, they said the following:
The central bank of Germany will no longer accept bank bonds backed by Ireland, Greece and Portugal as collateral, becoming the first euro-zone central bank to exercise a new privilege to protect its balance sheet from the region’s debt crisis. The decision signals the determination of the Deutsche Bundesbank to limit risks from the nonstandard measures the European Central Bank has taken to combat market stress during the crisis.
the reason why Germany has been trying to keep Greece et. al from crashing is because German banks hold a lot of Greek, Spanish, etc. bonds. This move by the Bundesbank makes no sense unless it’s only the start (or maybe even the middle). Expect to see German banks doing their best to get rid of their exposure to “Club Med” bonds, because if they’re not good enough for the Bundesbank, clearly they’re not good enough for German banks that aren’t backed by the taxpayers.
Possibility 1: German banks significantly reduce their exposure to Club Med debt: At which point Germany tells the Greeks to stuff it, and either the Greeks get booted out of the Euro, or German leaves (sorry, but the idea that the Greeks will actually get their house in order is too silly to consider).
Possibility 2: This causes a run on Club Med debt, as everyone else decides that if it’s not good enough for the Bundesbank, it’s not good enough for them. At which point the cost of new debt goes so high for the Greeks and other Club Med countries that they can no longer roll over their existing debt, let alone continue running their normal deficits. At which point, the Club med countries get kicked out of the Euro, or else Germany goes back on the Deutsche Mark.
In any event, the German political class has accepted that their voters won’t let them subsidize the Euro any more. Now that they’ve accepted that, the Euro in its present form is toast.
I wonder how much this has to do with Sarkozy’s upcoming defeat in the French elections? My guess is “a lot”. I think the German political class thought that with Sarkozy, they could get a deal that the German voters would accept. With the Socialist, they know this isn’t the case, so now it’s time to mend fences with the German voters (who’ve been nothing but pissed about the bailouts), and let the rest of Europe go hang.
WWII is now over. The Germans no longer feel guilty enough about it to pay to keep the Euro going.
Wait for commentary by William Russel Mead in 3 … 2 … 1 …