German High Court Doesn't Say "Nein!" Exactly, But...

I would like to emphasize a comment I heard earlier this morning on CNBC.

The German Constitutional Court has ruled that it will not stop the ESM from being formed by rejecting the complainants requests and removing the temporary injunction. However, before you join the crowds in celebrating the ruling there is a detail or two that should probably be considered.

The court also ruled that the German liability as related to the funding of the European Stability Mechanism cannot exceed 190 billion euros as things stand now. Any increase to the amount which Germany will be liable for must be approved by the Bundstag (one of the houses of Germany's parliament, the lower house) and both houses of Germany's parliament must be "advised" and kept informed.

Here are a few items to note:

• The ESM is to be EUR700 billion in size.
• All 17 EMU (European Monetary Union) member countries are "required" to contribute to funding the ESM.
• Germany's share out of the 17 countries is 27.1464% which comes to 190.0248 billion euros.
• The treaty from 2010 which establishes the European Fiscal Pact and the European Stability Mechanism has not yet been ratified.
• The ESM does not exist yet.
• Because the ESM does not yet exist there has not yet been any funding said entity.
• Countries which have received a bailout are nonetheless projected to contribute to the ESM. This would include Greece, Ireland and Portugal.
• Countries which are on the verge of, or in the process of, receiving a bailout are expected to make their contributions also. This list of "possible bailout" countries could include Cyprus, Slovakia and possibly others.

Now please consider those last two items. Collectively those five countries are expected to contribute 55.5681 billion euros to the 700 billion euro ESM. That would be 7.9383% of the total funding planned.

To me the ridiculous "logic" is mind-boggling. Greece is failing to meet its programme targets and is scrambling to convince the "Troika" to approve the disbursement of more bailout funds. Without the additional money Greece stands a very good chance of becoming bankrupt and likely defaulting on its outstanding debt. And yet it is expected to contribute almost 20 billion euros to the ESM.

I'd say that's totally INSANE!

Or is Europe going to give money to the bailout funds so that the bailout funds can give money to Greece so that Greece can give it back to the bailout funds. Sounds like a shell game to me.

But the EU politicians and the ECB must keep up this scam so that appearances may be maintained. Especially now that the German court has effectively limited Germany's ability to contribute.

Here's the bottom line. If the 5 "bailout" countries don't contribute then the remaining 12 must fund the full 700 billion euro ESM. Germany's percentage share would expand from 27.1464% (if 17 countries contributed) to 29.4872% (if only 12 countries contribute). This would result in Germany's capital subscription increasing to 206.4103 billion euros.

But the German Constitutional Court just ruled that Germany is not allowed to have its liability exceed the 190.0248 billion euro level without first having such an increase at least discussed in both houses of its parliament and approved by the Bundestag.

Next, consider what would happen if Spain needed a bailout. Spain's funding share which would be lost is about 11.9% or roughly EUR83.3 billion. Losing that would further increase Germany's share.

Further, what if both Spain and Italy go under? Their combined portion of the ESM is just shy of 30%. That's almost EUR210 billion out of the total EUR700 billion.

And now you begin to understand why Spain and Italy cannot be allowed to fail and why their bailouts must be disguised as something else. Thus we now have the Spanish bank bailout of 100 billion which basically works as follows:

• The EU through the ESFS (European Financial Stability Facility) provides funds to the Spanish Bank Bailout Fund.
• The Spanish Bailout Fund gives the money to the Spanish banks.
• The Spanish banks use the money to buy newly issued Spanish debt which Spain must issue to fund its deficit.

But you see, in the eyes our Europe's wise men (and women), that doesn't qualify as bailing out Spain itself.

Oh, and then the banks pledge the newly bought Spanish debt as collateral at the ECB and get new funds while the ECB gets the Spanish bonds.

If you now are thinking that the end result is the ECB has basically violated its charter and funding a sovereign EU member, well then you just don't understand high-level international finance.

Or maybe, just maybe, you actually do.

 

I'm not yet certain it is going to be meaningful but the initial gains following the German Constitutional Court ruling seem to be fading to a fair degree.

For example the DAX was up 100 points as the ruling was read but has now fallen back to a gain of just 52 points. That's still a nice advance of about +0.75% but there does seem to be a loss of momentum.

In a few hours the Apple announcement could re-stoke the fires so the chances for an explosive "Up Day" remain fairly good. My instincts tell me that the market will initially react favorably to Apple's new product(s) if for no other reason than the near cult-like following the company and its products enjoys. After that though further, more in depth analysis could lead to market disappointment.

Oh, and in case you forget, the Federal Reserve meeting begins today. The new round of QE is widely expected to be announced tomorrow.

Like I said: Not dull.

 

Have a good one...

Curtis Bergquist
Manager – PRO Trader Service

Wondering what Curt’s next move will be? Take a Free Trial of The PRO Trader Today P.S. The PRO was well positioned for the recent correction and has gained +11.9% since April 1st while the S&P 500 lost -5.5%

 

 

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