It may come as some surprise to the German public, media and political class, but the Eurozone crisis hasn’t cost them a single cent to date.
If anything the crisis has boosted German exporters, by keeping the Euro itself weaker than it would otherwise be, while Germany can now borrow at record low rates because the crisis has given rise to a ‘flight to safety’ in the sovereign bond market.
Like all other non-bailed out Eurozone members, Germany has made significant contributions in the form of contingent guarantees to the European Financial Stability Facility (EFSF), and indirectly through its shareholdings in the IMF and ECB. More is in prospect with the advent of the European Stability Mechanism (ESM) this summer.
Because of its economic heft, Germany is in each case the biggest European ‘contributor’, but so far contributors have got gilt-edged protection of their financial position while, in the case of the recent Greek write-down, private sector creditors took a hit to the tune of 70%.
Bailout funds themselves generate a small margin of profit, on top of their funding cost, so long as they are repaid in full. Being the biggest shareholder in each of these institutions (the biggest European shareholder in the case of the IMF), Germany stands to profit most so long as these official lenders are spared ‘haircuts’.
Moreover, it is hardly baseless to suggest that bailouts of peripheral Europe represent the backdoor bailout of those German, French and other banks with significant exposure to peripheral sovereign debt.
EFSF and IMF bailout lending has been given seniority, while the ECB – which had purchased significant amounts of Greek debt at knock-down prices on the secondary market – will actually make a profit as things stand, being repaid 100 cents in the euro for debts acquired at a fraction of the cost.
So, could this be the most profitable bailout in the world?
For a few weeks in late 2008, it seemed that Ireland’s infamous bank guarantee was the ‘cheapest bank bailout in the world’ as the late Brian Lenihan Jnr., then Finance Minister, had claimed.
Of course, what the Irish authorities then failed to understand was the important distinction between ‘cost’ and ‘risk’. The Irish state had taken on contingent risks amounting to three times Ireland’s annual output. Costs would come later – 40% of GDP and rising.
Equally, while official lenders have been protected to date, this doesn’t mean that protection is sacrosanct. We are given to understand that Private Sector Involvement in Greece is the beginning and end of haircuts on debts in bailout countries.
Yesterday’s taboo can quickly become tomorrow’s orthodoxy, as we have learned over the course of the crisis, so the position of Germany and other official lenders is hardly without risk.
In the Greek case, where debt-to-GDP will still be 120% by 2020, even in a best-case scenario, it is doubtful whether this protection will survive the crisis intact.
Write-downs are not happening up-front for two reasons: so that domestic public opinion in creditor countries does not become implacably opposed to steps to come, and so that governments in bailout countries are induced to meet existing commitments.
Given how much skin they have in the game, and how high are the stakes for the entire European project, it may be somewhat facetious to suggest that Germany is profiting from the crisis.
Nor should it be forgotten the very real losses incurred by the Germans from bailing out Hypo Real Estate in 2008, largely relating to multi-billion euro losses at IFSC-based Depfa Bank, which it had acquired only in late 2007.
Had this acquisition not taken place, responsibility for regulating Depfa would have remained with the Irish authorities, and the losses would have fallen on Irish, rather than German, taxpayers. It may sometimes be forgotten in Ireland, but the Germans themselves certainly aren’t forgetting it.
The ECB’s trillion euro LTRO liquidity injection into the European banking system since December not only staved off a renewed credit crunch, it gave market participants a false sense of security.
Make no mistake, we are in the eye of the storm – the Eurozone’s existential crisis has not passed, as developments in Spain, and the markets’ resulting reality check, has proved in recent days.
Taxpayers, in Germany and elsewhere, will bear real and significant costs to save monetary union and the wider European project. That is the price of protecting peace, prosperity and progress in our European Union – the price of solidarity.