Is It Politics Or Is Dr Steinmeir Correct?

Yesterday the leader of the Opposition in the German Parliment stood up and made a speech outlining the denouement of the Euro.

In his address he predicted that the European Central Bank (ECB) is on its way to becoming the "bad bank" for the Eurozone, taking more and more high-risk and overvalued assets stemming from the "eventual core countries" onto its books in order to salvage the Euro while debt restructuring would take place in the periphery zone countries.

Now I am a confirmed supporter of the Euro and the European Union. I believe the launch of the Euro was perhaps done a bit too early. I would have preferred to have seen the introduction of a unified tax, labor law and budget policy for the entire EU before the roll-out of the Euro, but the politics didn't allow for that.

It is ironic that if it were not for the financial crisis we wouldn't have the present Euro crisis. These crisis' however are forcing the issue on the Euro.

Dr Steinmeir is an opposition politician, specifically Chairman of the Social Democratic Party of Germany (SPD) and as such his rhetoric has recently been more populist than usual as he senses the opportunity to regain power in the next election.

This makes it difficult to differentiate between his political posturing, and perhaps a proper analysis of where we are.

But in this case I think he has touched on the keystone to the whole process. There will be a certain amount of debt restructuring. This was echoed at the EU Leaders' Summit in which they announced “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

Although this is being discussed as a compromise and being downplayed, the fact is that bondholders will take some pain in this. The question will be high up the capital structure the pain goes. There is little doubt that the holder of perpetual subordinated debt will get hurt. It remains to be seen if all subordinated debt and even if senior debt holders will be impacted.

The question of moral hazard would appear to be back in the limelight-which would be the beginning of a more rational allocation of loss which to date has been to the taxpayers.