If the German politicians don’t stop fighting among themselves and focus on how to help their distressed southern neighbors, the euro will break up, Marc Ostwald from Monument Securities said Friday.
Bickering among German politicians has reached embarrassing depths and has blown apart any perceived notion of unity, as Europe’s strongest economy remains split between rescuing Club-Med nations Greece, Portugal and Spain, or pandering to their own electorate, who remain fiercely opposed to the $1 trillion bailout package recently passed.
“What are the German politicians doing?” he said. “They’re arguing between themselves. It’s a horrible coalition. If the current batch of German politicians don’t want to provide a lot more support, they’ll pay a very dear price.”
He said, “The euro will break up, because there’s no sense of unity.”
The big failings with regard to the euro zone debt, according to Ostwald, is that the “French and Germans had to do everything under the sun to ensure that the euro zone would prosper.”
The moment the Germans expressed hesitance about this, “the whole thing started to fail,” Ostwald said.
Ostwald said that a “manageable debt load" really depends on a country's ability to grow, and that for this reason, Greece, Portugal and Spain remain problematic.
A Dangerous Game
The euro isn’t being “dumped” anymore and the markets may have stabilized, but unfortunately Europe has found itself in a deep liquidity trap, according to Ostwald. “Balance sheets are still distressed. We’ve realized the worst consequences of it. It’s all hot money.”
Ostwald warns investors that it’s a “dangerous game” to keep buying government debt every time there is a slight widening of spreads.
“What we should have an environment where the ECB is a back-stop buyer when things get nasty, but doesn’t necessarily tighten spreads. But market makers will continue build in massive concessions — there’s been about 30 basis points spread relative to the Bund in the past five days. It's merciless.”
He continued, “Governments have transferred all the risk of the private sector to the public sector,” but eventually, all of this debt will have to be transferred back to the banking sector.”
He worries that because markets are “sequential rather than lateral thinking,” and that investors will go looking for the next sovereign debt crisis in the UK or the US if, and when, they regain trust in European politicians.