Future Bailouts In Jeopardy As Germany Reaches Breaking Point

Includes: GLD, SPY
by: Colin Lokey

If there were lingering questions regarding Germany's stance on the ECB's plan to purchase Spanish and Italian debt, Bundesbank President Jens Weidmann answered them Sunday in an interview with Spiegel. While it should be abundantly clear by now that no matter what Angela Merkel says regarding her desire to preserve the euro in its current form, all signs point in the opposite direction if one looks at what other German politicians are saying.

On Friday, for instance, while Merkel was busy dismissing the notion that Germany would prefer to let Greece go in a meeting with Greek Prime Minister Antonis Samaras, the chairman of Merkel's Christian Democrats in parliament Volker Kauder told German public television network ZDF that a Greek exit from the currency union would be "no problem." Similarly, Alexander Dobrindt, the leader of Merkel's coalition partner the Christian Social Union, flatly opined that come next year Greece would no longer be part of the EMU.

While all of this supports the notion that Germany has officially reached the breaking point on Greece, Weidmann's comments to Spiegel may cut the deepest of all from the periphery's perspective because they suggest that the German central bank is opposed not just to the idea of continuing to prop up a seemingly obstinate Greece, but to the whole idea of continuing to support the bailout effort in general. Weidmann noted that ECB bond purchases are tantamount to the funding of governments via ECB money printing which is outside the central bank's mandate of maintaining price stability. He went on to emphasize that decisions on how to support floundering member nations should be made democratically via parliaments, not by decree via the central bank. Weidmann also equated continual debt monetization to the perpetual administration of drugs to an addict and noted that should the debt purchased by the ECB deteriorate, the burden is borne ultimately by eurozone taxpayers. Finally, Weidmann warned that monetary policy is becoming increasingly beholden to fiscal policy in the eurozone.

As if that wasn't enough to put a damper on the periphery's bailout hopes, Germany's Economy Minister Philipp Roesler and German Finance Minister Wolfgang Schaeuble both told the media on Sunday that Greece's contention that it didn't need more money, just more time, was nonsense, as "time is always money." All of this suggests that it will be increasingly difficult to get Germany on board the bailout boat going forward. This is just one more reason to believe that eventually, the situation in Europe is going to implode. It simply is untenable and it is quite unrealistic to expect that the core countries will continue to support the periphery.

There seems to be an idea among optimists and bulls that commentators calling for a eurozone breakup are alarmists and are simply "crying wolf," so to speak. The fact that the union hasn't broken up yet would appear to vindicate this notion. I would argue that the core simply hasn't been pushed to the breaking point yet. Investors should ask themselves how long countries with relatively healthy economies will be willing to bet their financial future on the ability of Spain, Italy, and Greece to get their house in order. I contend that the music is about to stop. Investors should allocate at least 20% of their portfolio to gold (NYSEARCA:GLD) and consider putting on short positions in the S&P 500 (NYSEARCA:SPY) to guard against collateral damage from a swift deterioration in Europe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.