A true debacle happened. Just when we thought the euro was safe, that ECB President Mario Draghi had single-handedly duct-taped the Eurozone back together in the summer of 2012 with his magic words, “whatever it takes.” Markets assumed that they were backed by the ECB’s printing press, and they loved their assumption. Spanish, Italian, even highly dubious Greek debt, some of it with a fresh haircut, soared. And hedge funds and banks gorged on it and loved it. The debt crisis was over! Stocks soared even more. Money was being made.

So bank bailouts continued, and the Eurozone recession proved to be a nasty long-term affair, but no problem, everything seemed to be guaranteed by the ECB. Debt-sinner countries, as Germans like to call them, could suddenly borrow for nearly free, and neither deficits nor debts mattered to financial markets.

But now comes ratings agency Standard & Poor’s and douses our illusions, because that’s all they were, with a bucket of ice water. The soaring popularity and electoral successes of Germany’s anti-euro party, Alternative for Germany (AfD), could push Chancellor Angela Merkel and her party, the conservative CDU, to take a harder line against bailouts, hopes of QE, and all manner of other ECB miracles that financial markets had been counting on. And it could spook them. And the nearly free money could suddenly dry up. So S&P warned:

None of this would matter much, if we were to assess that the euro crisis is safely behind us. However, this is unlikely to be the case. Eurozone output is still below 2007 levels, and in 2014 the weak recovery has come to a near halt in much of the euro area. Unemployment remains precariously high and disinflationary pressures have been mounting. Public debt burdens continue to rise in all large euro area countries bar Germany.

Anti-euro movements have been coagulating across the Eurozone. There is Marine Le Pen, of the right-wing National Front (FN) in France. “Let the euro die a natural death,” is her mantra. She finished third in the 2012 presidential election, and some polls give her a shot at winning the next one. But she’d be the most impotent President in the 5th Republic. Her party will have only a tiny presence in parliament, based on the French system that was designed by the “political class,” as they call it, to protect itself against outsiders like her party. And it’s that parliament that would get to vote on the euro.

Austria has Frank Stronach, founder of Magna International in Canada, and one of the wealthiest Canadians. Austrian by birth, he went back and founded the Team Stronach for Austria in 2012. Europe should guarantee peace, the free movement of goods, people, services, and capital, he said at the time, but it “can only function if every country has its own currency.” The efforts to bail out debt-sinner countries were “insolvency procrastination.” And “the sooner Austria gets rid of the euro, the better for the Austrian people.”

In September 2013, Team Stronach obtained nearly 6% of the votes in the national parliamentary elections. Alas, the party has since become more concerned with balanced budgets, a simplified tax system, a reduction in bureaucracy, and the like.

Italy has Beppe Grillo, leader of the 5-Star Movement, a Eurosceptic with considerable election successes. And there are others across the Eurozone, vegetating or thriving, but none of them got the attention of the ratings agency, not until AfD started soaring in the polls.

During the debt crisis, and with a good dose of brinkmanship, Merkel had made sure that the Eurozone stayed together. It put German taxpayers on the hook to the tune of hundreds of billions of euros. And when her mantra – “There is no alternative” – hit resistance in her own party, wayward voices were gagged.

“Politics is nourished by alternatives,” announced Konrad Adam out of the blue in March last year, one of the founders of the AfD that didn’t even legally exist at the time. He demanded the orderly dissolution of the “coercive euro association.” The euro would be replaced by parallel national currencies or smaller, more stable monetary unions. Governments should stop borrowing piles of money. And power should be returned from the unelected EU government to the elected parliaments of member states. Those demands have been ringing true to an increasing number of Germans.

During the federal elections last fall, the AfD failed to win enough votes to jump over the 5% minimum required to enter parliament, but it has since put representatives in the European Parliament. And its successes in state elections in late August and mid-September were considered tectonic shifts: 9.7% in Saxony, 10.6% in Thuringia, and 12.2% in Brandenburg. Some pundits in the Anglo-Saxon media brushed it off. These states are in eastern Germany. No way that this success could be duplicated in the wealthier western states.

But the Euro Breakup Index twitched. In July 2012, at the peak of the debt crisis, it reached 73% probability that the Eurozone would lose one or more members. But Draghi’s magic words were already out, and the index declined precipitously. In July 2014, it was down to 7.6%. But for August, as the election results began taking on shape, it ticked up to 8.2%. September hasn’t registered yet.

AfD wasn’t just an eastern success. A poll by Forsa has now revealed that the AfD would get 10% of the vote in the Federal Republic, up from earlier polls that had pegged it at 8%. It was the first time on a nationwide basis that it breached double digits. Its rise seems inexorable.

Merkel, the consummate political animal, would have to react to AfD if she wanted to hang on to her party’s voters. And that’s what S&P fretted about in its report:

As the largest euro area government and the benchmark safe-haven issuer, Germany’s role in the joint crisis management has been critical. The relatively strong domestic political position of the German federal government facilitated the necessary compromises.

Until recently, no openly Eurosceptic party in Germany has been able to galvanize the opponents of European “bail-outs,” and of German taxpayers assuming contingent financial risks. But this comfortable position now appears to have come to an end.

The “ascent of AfD” was most likely not “a short-term phenomenon.” The tectonic shifts felt in Germany could have “repercussions” beyond Germany, including “implications for euro area policies by diminishing the German government’s room for maneuver.”

Should AfD’s popularity persist in the polls, we would expect the CDU to attempt to reoccupy the political space it had previously abandoned. Accordingly, we would envisage a rising probability of the CDU’s (and hence Germany’s) policy stance hardening toward euro area compromises. This could include less flexibility in easing the pace of fiscal adjustment of other European sovereigns, or resistance toward a coordinated pan-European investment plan that some European governments are aiming for. It could also lead to more openly critical rhetoric against the ECB’s policies, which would further complicate unconventional monetary policy.

This could “diminish the confidence of financial investors in the robustness of multilateral support upon which any Eurozone sovereign could draw….” This would lead to “less benign sovereign funding conditions for lower-rated euro area sovereigns.”

The risk: a semblance of reality might return to the government bond markets in the Eurozone. S&P warned that funding costs would rise, and perhaps rise to where it would be costly – rather than nearly free – to fund the deficits and roll over the debts.

It would be the end of Draghi’s magic spell. “Whatever it takes” would become a meaningless phrase. Germany could put the ECB on a very short leash. The bailout mechanisms could be shoved aside. Credit risk would be back on the front burner. Countries that would suddenly find themselves unable to deal with their debts might have to look for alternatives, such as defaults, haircuts, or dropping the euro. The debt crisis would be back with a vengeance, and worse than before: debts are far bigger than before, and bonds have soared to record highs. They’d have a long way to fall. And all that money that had been made through Draghi’s magic words would go to heck.

That’s what S&P was warning about. Investors would lose their shirts.

But in the AfD’s inner sanctum, this sort of warning by one of the top ratings agencies must have been seen as a badge of honor and a validation. It came with the sweet smell of power. The power to re-introduce fear and reality into the markets; the power not of leading Germany, but of influencing policies about the euro, the ECB, bailouts, guarantees, deficits, and inflation – all near and dear to many Germans.

The German Finance Minister already showed the harder edge, as the G-20 finance honchos, under the leadership of our fearless Treasury Secretary Jack Lew, fretted about faltering global growth. Read…   OK, I Get It. Things Are Coming Unglued

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