by Michael Sankowski, GenerateFX
Not enough people understand one of the basic facts about Germany’s future fiscal situation, but they are starting to come around.
Germany needs to write a huge check to bailout Europe, no matter what happens in the future. If Greece stays in the euro, Germany needs to fund the ESM (European Security Mechanism) and that involves writing a huge check. If Greece leaves the euro, Germany needs to recapitalize their banking system, which also involves writing a huge check.
Either way, Germany will need to borrow more money, and increase their fiscal spending. It’s not a matter of “do they or don’t they?”, it is a matter of “How much” and “When?”
A Greek exit of the euro would trigger Germany needing to write the check for a slightly larger amount – but it would be much sooner and with more catastrophic consequences.
Remarkably, Germany doesn’t seem to understand the mandatory check writing either:
“Chancellor Angela Merkel’s spokesman Steffen Seibert insisted on Wednesday that Germany sees no need to increase the size of the permanent ESM. “The German government’s position has not changed,” he said. “That means no, it is not necessary.”
The current estimated maximum size of the ESM is only euro 750bn. It is estimated Germany’s total exposure is 2.9tn euros, but there are other lower estimates.
Now, there is a reason for that 2.9 trillion number – its the amount of money necessary for the European banking system to be recapitalized in full. Germany has massive exposure to a collapse of the European banking system.
This basic fact is one of the big reasons the EURUSD is headed to 1.1000 or lower over the next year. As this awareness grows in the wider trading community, it will force the EURUSD lower.
Editor's note: GenerateFX posts articles several times a week on GEI Forex Trader. This article appeared 27 June 2012.
Can the Euro Go to $1.10? by Michael Sankowski (GEI Investing, 10 January 2012)
About the Author
Mike Sankowski, is a financial writer and trader. His 20 year financial background spans working for hedge funds, trading at the CME, and designing trading and clearinghouse products. His websitewww.traderscrucible.com is where he comments on monetary theory, economics and trading. He has also started a new blog, Trend Following 101. He is the creator of the TC rule for fiscal policy. He is a CFA and CAIA Charterholder. He spends his free time with his family driving the kids to hockey, and is part of the Box Set Authentic musical collective.