In late October, a forward looking survey by market research group GfK indicated that German consumer morale was at its highest level since October of 2007. The reason: a positive outlook for the jobs market and incomes. On October 30 the German Federal Labor Agency reported that the number of jobless Germans rose 20,000 in October, twice the amount forecast by economists. At the time, I said the following about what that report could mean for the psyche of the previously optimistic German consumer:
"Tuesday's employment report could dent that confidence and bring consumer sentiment more inline with German business sentiment which, by contrast, hit a two and a half year low in October."
Tuesday morning, German investor confidence fell 'unexpectedly' in November as the German ZEW index dipped to minus 15.7 on expectations of a rise to minus 10 from minus 11.5. The ZEW is meant to measure German investors' expectations about the German economy six months in advance and Tuesday's reading is consistent with the idea that the crisis across Europe will weigh on the region's strongest economy throughout 2013.
ZEW investor confidence and GfK consumer morale have moved up together over the past two months -- we will see if consumers continue to maintain a positive outlook amid falling investor confidence, rising jobless figures, and decisively negative German economic data.
European stocks fell broadly Tuesday on the news with the German DAX sliding nearly 1%.
Meanwhile, the Greek drama drags on. Analysts at Goldman Sachs now say an Official Sector restructuring (OSI) of Greek debt is the only way to make the country's debt burden sustainable. Essentially, Goldman claims that the proposed debt buybacks wherein the ECB would sell the Greek bonds it holds back to Athens and/or a reduction of interest rates on the Greek bonds held by the official sector will both be insufficient to bring about a meaningful reduction in the country's debt.
Although eurozone governments and the ECB have resisted calls for an OSI thus far, it isn't clear how the proposed measures such as a Greek debt-buyback are expected to make a dent. If Athens were to buy back its bonds from the ECB the savings would only amount to around 8 billion euros, less than 10% of what Goldman figures Athens needs to bring its debt-to-GDP ratio down to 120% by 2020 as demanded by the IMF.
Even after being given two more years to bring its budget deficit under control (so 2022 would be the new target) someone, somewhere has to come up with 32.6 billion euros, the projected financing gap. According to Bloomberg, German finance minister Wolfgang Schaeuble (who is usually rather pragmatic) said the following about the shortfall:
"...Greece's aid program can be re-engineered to plug a financing gap of as much as 32.6 billion euros ($41 billion) without costing creditors a cent."
So more money from thin air then and likely another fantastic example of self-deception in the eurozone.
While the finance ministers were busy in Brussels, Greece did the only thing it could do to roll the 5 billion bond due to the ECB Friday -- it sold T-Bills. Of course primary dealers in Athens took down the vast majority of the debt. From Reuters:
"Greece on Tuesday raised most of the funds it needs to refinance 5 billion euros of T-bills this week and avoid a default..Athens has won approval from the European Central bank to increase its stock of T-bills so it can continue rolling over short-term debt."
This is unconscionable behavior by a central bank. The ECB is keeping up appearances by publicy stating that it is "by and large done helping Greece" while behind the scenes it prints euros to hand to Athens as part of Emergency Liquidity Assistance so Athens can pay bonds owed to...the ECB. This is perhaps the largest circular funding scheme ever witnessed.
Investors should make a sincere effort to study the mechanics of this and understand how Greece is being funded. If this type of treatment is afforded to Spain the euro as a currency and as a union will be in serious jeopardy. While policymakers move money from one pocket to another trying to bailout the periphery, the only thing holding the region together -- the German economy -- is dying slowly.
In the final analysis, they are running a ponzi scheme in Europe. That is not an attempt at gratuitous criticism, it is an indisputable fact. Investors should bet against the euro (FXE), European equities (FEZ), and periphery debt.