Will Germany end reliance on bailouts and instead adopt solution for ending Solvency Crisis?

The pressure is growing on the German government to do something to preserve the euro zone and halt the market fears that have led to the collapse of both bank share and Euro sovereign debt prices.

Germany faces two dramatically different choices for how to proceed.

• It could continue with more of the same strategies that have failed on a global basis since the beginning of the Solvency Crisis in 2007.  This includes putting its own solvency at risk by offering government guarantees and bailouts to cover a problem the size of which is limited only by the market's current worse case assumption.

• It could insist on first taking the time and working with all market participants to understand the true size of the problem and only after the true size of the problem is known selecting an appropriate action plan for addressing it.

The first choice is not a solution to a problem, but rather the treatment of a symptom.  Since the underlying solvency problem is not addressed, we can expect it to re-emerge.

There are plenty of example of the solvency problem re-emerging.  We have Ireland, Portugal, Greece, Spain, Italy and now France who have had the solvency of both their banks and their sovereign questioned by the market.

Each time the market has questioned solvency another program has been created and austerity policies put in place.  Subsequently, each of the programs has been questioned along with the financial strength of its sponsors.

Should Germany make this choice and treat the latest symptom it will put is own solvency at risk without fixing the solvency problem.  

The reason this is true is the total size of the balance sheets of EU banks and the total amount of debt members of the EU need to issue vastly exceeds Germany's ability to backstop when the market fears for the solvency of these institutions and member countries.

The second choice is to solve the solvency problem.  The only way to solve the problem is by disclosing all the facts to all the market participants.  It is only with disclosure that market participants can answer the question of who is solvent and who is insolvent.  It is only after answering this question that market participants know how much any financial institution or its host nation is insolvent by.  It is only when the amount of insolvency is known that a solution to restore solvency can be implemented.

When you know what you are dealing with, a much broader range of solutions presents itself.

Your humble blogger has been advocating that governments choose to solve the solvency problem and not treat the symptoms since the beginning of the solvency crisis.  

It has taken four years, but we have finally reach the limits of what EU governments can afford for treating the symptoms.  We have finally reach the time, where the EU governments, in particular Germany, should say no more throwing good money after bad to treat symptoms and that they are going to fix the solvency problem.