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German and US governments split on 'Euro TARP' proposal

|Includes: Sprott Physical Gold Trust (PHYS)

Downtrend line Speculation that the European Union is planning to implement a “Troubled Asset Relief Programme” for banks – similar to the one implemented by the US government in late 2008 – drove stock and commodity prices higher yesterday, with precious metals also rallying on the news.

However, late yesterday news broke of splits between European nations on exactly how much of a “haircut” (losses on bonds) banks should be expected to take on Greek debt. This question has wider economic implications, considering the vulnerability of the Irish, Portuguese, Spanish and Italian economies, and the possibility that some or all of these countries may also be heading for default. If so, the question of how much of a loss banks should be expected to take on Greek debt could set an important precedent.

The growing tensions between Europe and America were once again on display, following an angry outburst from German finance minister Wolfgang Schauble in response to American pressure to leverage the European Financial Stability Facility. "I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense… It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government" Schauble commented. This follows remarks from President Obama on Monday that appeared to rebuke EU leaders for “scaring the world” with their failure to arrive at a plan for dealing with the Continent’s debt crisis.

It remains doubtful that such a “Euro TARP” scheme would work, and in addition, it’s far from clear that German courts will authorise the German government and parliament to assent to this scheme. As Andreas Vosskuhle, head of Germany’s constitutional court, pointedly noted yesterday: “politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.”

Angela Merkel’s coalition government faces a tight vote today in the German parliament on whether or not to assent to raising the EFSF bailout fund to €440 billion ($593 billion) from €250 billion, a move that German and other eurozone lawmakers are in the process of ratifying. It’s looking as though Merkel’s coalition will have to rely on votes from opposition Social Democrats and Greens to get the measure through. According to opinion polls, two-thirds of Germans oppose eurozone bailouts.

If the market’s hopes for “Euro TARP” are dashed – as seems highly likely – then more selling will ensue in stock and commodity markets. This will certainly affect silver, platinum and palladium in the short-term, but it’s harder to say how gold will react. We are now heading into Indian festival season – the gold price traditionally performing well from October until the end of March. Very strong support exists for the metal at any price under $1,600. Over the next few weeks and possibly months we could be in for a period of consolidation in the gold price, before the market is ready to challenge the record price of $1,920.