Are you ready for a German default? «
It’s been reported that over the 12 months ended July 31, 2012, a total of 326 billion euros in bank deposits was withdrawn from the euro-zone periphery of Spain, Portugal and Ireland, for obvious reasons, in a development akin to a bank run.
Yet, curiously enough, most of this money ended up being transferred to the perceived safe havens of France and Germany, which suggests a lack of awareness of the financial state of the latter countries.
In this regard, it should be noted that Standard & Poor’s actually projected back in March 2005 that all major Western countries of France, the U.S., Germany and the U.K. are heading for junk status/default — a fact that appears to have gone completely unnoticed by most analysts, although, by now, that projection should only have become all the more relevant.
The bank bailouts and stimulus packages following the 2008 financial crisis and subsequent euro-zone crisis would only have worsened those governments’ balance sheets further, if anything, and as we all know the U.S. already lost its Standard & Poor’s AAA rating in 2011 — five years ahead of the original projection schedule.
More recently, we have seen some senior German figures raising their voices to point out those risks. From German Finance Minister Wolfgang Schäuble’s “we’re not swimming in money, we’re drowning in debt”, to Frankfurt University Professor Wilhelm Hankel’s “Germany cannot keep paying for bailouts without going bankrupt itself.”
And just last week the head of the German Bundesbank, Jens Weidmann, analogized recent ECB policy and monetary stimulus to the scene in the classic drama of Goethe’s ‘Faust’. He said that “the devil Mephistopheles, disguised as a fool, convinces an emperor to issue large amounts of paper money, which allowed the state at first to rid itself of its debts while consumer demand grew strongly and fueled a strong recovery, yet later develops into inflation resulting in the monetary system being destroyed by rapid currency depreciation.”
Though such comments have slowly been raising the awareness of the inflation and unsustainable debt risks of the current “safe haven” of Germany (and again the same largely applies as well to France, the U.K. and the U.S., with the latter sitting on an estimated fiscal gap of over $200 trillion), these risks clearly don’t seem to be priced in yet into the relevant sovereign bonds and currency values.
Accordingly, investors seeking a safe haven nowadays, especially those currently holding most of their assets in EUR/USD/GBP cash and/or fixed interest, may be well advised to carefully weigh up the risks (mainly inflation and default), vs. the upside potential (interest yields are already at record lows), and perhaps consider the inflation- and default-proof metals of gold and silver as alternative safe havens.