Satyajit Das: Germany might not be strong enough to save euro strugglers

Midweek view: The faith of Europe, America and the rest of the world in Germany's ability to come to the rescue is misplaced

Contrary to the popular narrative, Germany may not have the financial resources and strength to rescue the peripheral nations of the eurozone. Germany is indirectly exposed through its support of various official institutions such as the European Union, European Central Bank, the International Monetary Fund and specially bailout funds. The exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy is €918bn (£740bn) as of this April.

Germany's guarantees supporting the European Financial Stability Fund are €211bn and will increase if Spain and Italy require assistance and cannot act as a guarantor.

The European Stability Mechanism, the replacement to the EFSF which is planned to commence next month, will require a capital contribution from Germany which will push its budget deficit from €26bn to €35bn. If the ESM lends its full commitment of €500bn and the recipients default, Germany's liability could be as high as €280bn.

The largest single direct German exposure is the Bundesbank's more than€700bn current exposure under the Target2 (Trans-European automated real-time gross settlement express transfer system) to other central banks in the eurozone.

Designed as a payment system to settle cross-border funds flows, surplus countries, like Germany, have been forced to use Target2 to finance the funding needs of peripheral countries without access to money markets to fund trade deficits and the capital flight out of their countries. Germany is by far the largest creditor in Target2.

Greater monetary and fiscal integration would require mutualisation of debt through the issue of eurozone bonds backed by all member states. As the largest, most creditworthy nation in the eurozone, Germany would bear the largest financial burden.

Germany's Target2 exposure would also continue to rise, at a rate of €80bn-€160bn per annum to finance trade deficits. The increase in exposure may be higher if needed to finance budget deficits of weaker eurozone members and the weak banking sector. Germany's Target2 exposure has risen by around €237bn, or around 34 per cent, in the past eight months. If Europe relies on its current policy of partial solutions – austerity and monetary accommodation by the ECB – then the debt of peripheral nations will shift to official institutions. Germany's financial liability will also increase.

In the peripheral economies, withdrawal of deposits from national banks (a rational choice given currency and confiscation risk) may necessitate a Europe-wide deposit guarantee system or further funding of banks. Any Europe-wide deposit guarantee system, provision of capital or further funding of banks increases Germany's financial liability.

If integration is not undertaken or the partial solutions fail, then some European countries will need to restructure their debt and potentially leave the common currency. Germany would suffer immediate losses. A Greek default would result in losses to Germany of up to around €90bn. Germany's potential losses increase rapidly as more countries default or leave the eurozone. There are also real economy effects. Austerity or default will force many European economies into recession for a prolonged period. German exports will be affected given Europe is around 60 per cent its market. In the absence of a Lazarus-like recovery in the peripheral economies, Germany's current exposures are not recoverable and the country faces large losses.

Hans-Werner Sinn, the president of Germany's IFO Institute, estimates if Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay nothing but the euro survives, Germany would lose $899bn (£573bn). If the euro also failed, Germany would lose over $1.35 trillion, more than 40 per cent of its GDP, or 30 per cent of German household assets (€4.7trn).

German officials are increasingly aware its resources are not unlimited and its attempt to balance the advantages of preserving the eurozone against its traditional preference for fiscal and monetary conservatism has failed, leaving the nation with severe financial problems.

The faith of Europe, America and the rest of the world in Germany's ability to come to the rescue is misplaced. But as the American author Norman Cousins noted: "Hope is independent of the apparatus of logic."

Satyajit Das is author of 'Traders Guns & Money' and 'Extreme Money'

Suggested Topics
Arts and Entertainment
'A voice untroubled by time': Kate Bush
musicReview: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Life and Style
Cooked up: reducing dietary animal fat might not be as healthy as government advice has led millions of people to believe
healthA look at how governments started advising incorrectly on diets
News
peopleJustin Bieber accuses papparrazzi of acting 'recklessly' after car crash
Life and Style
tech
PROMOTED VIDEO
News
people
Voices
voices
Sport
Roger Federer is greeted by Michael Jordan following his victory over Marinko Matosevic
tennisRoger Federer gets Michael Jordan's applause following tweener shot in win over Marinko Matosevic
Arts and Entertainment
Oppressive atmosphere: the cast of 'Tyrant'
tvIntroducing Tyrant, one of the most hotly anticipated dramas of the year
News
i100
News
Ukrainian Leonid Stadnik, 37, 2.59 meter (8,5 feet) tall, the world's tallest living man, waves as he poses for the media by the Chevrolet Tacuma car presented to him by President of Ukraine Viktor Yushchenko in Kiev on March 24, 2008.
newsPeasant farmer towered at almost 8'5'' - but shunned the limelight
News
Walter Matthau and Jack Lemmon in ‘The Front Page’, using an old tech typewriter
media
Life and Style
Could a robot sheepdog find itself working at Skipton Auction Mart?
techModel would allow robots to be programmed to control crowds and save people from burning buildings
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
News
i100
Arts and Entertainment
Suha Arraf’s film ‘Villa Touma’ (left) is set in Ramallah and all the actresses are Palestinian
film
Sport
Angel Di Maria poses with Louis van Gaal after signing for Manchester United
sportWinger arrives from Real Madrid and could make debut on Saturday
Arts and Entertainment
Kingston Road in Stockton is being filmed for the second series of Benefits Street
arts + entsFilming for Channel 4 has begun despite local complaints
Arts and Entertainment
Hooked on classical: cellist Rachael Lander began drinking to combat panic attacks
musicThe cellist Rachael Lander’s career was almost destroyed by alcohol she drank to fight stage fright. Now she’s playing with Elbow...
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Generalist HR Administrator, Tunbridge Wells, Kent - £28,000.

£25000 - £28000 per annum: Ashdown Group: Generalist HR Administrator - Tunbri...

Senior C# Developer (.NET, C#, JMS, TDD, Web API, MVC, integrat

£45000 - £75000 per annum + benefits+bonus+package: Harrington Starr: Senior C...

GUI Developer (GUI,C#,.NET,VB6)

Negotiable: Harrington Starr: GUI Developer (GUI,C#,.NET,VB6)SurreyCompetitive...

Junior Database Administrator (SQL, T-SQL, Excel, SSRS, Crystal

£30000 per annum + benefits+bonus+package: Harrington Starr: Junior Database A...

Day In a Page

Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?
Rachael Lander interview: From strung out to playing strings

From strung out to playing strings

Award-winning cellist Rachael Lander’s career was almost destroyed by the alcohol she drank to fight stage fright. Now she’s playing with Elbow and Ellie Goulding
The science of saturated fat: A big fat surprise about nutrition?

A big fat surprise about nutrition?

The science linking saturated fats to heart disease and other health issues has never been sound. Nina Teicholz looks at how governments started advising incorrectly on diets
Emmys 2014 review: Can they genuinely compete with the Oscars

Can they genuinely compete with the Oscars?

The recent Emmy Awards are certainly glamorous, but they can't beat their movie cousins
On the road to nowhere: A Routemaster trip to remember

On the road to nowhere

A Routemaster trip to remember
Hotel India: Mumbai's Taj Mahal Palace leaves its darker days behind

Hotel India

Mumbai's Taj Mahal Palace leaves its darker days behind
10 best pencil cases

Back to school: 10 best pencil cases

Whether it’s their first day at school, uni or a new project, treat the student in your life to some smart stationery
Arsenal vs Besiktas Champions League qualifier: Gunners know battle with Turks is a season-defining fixture

Arsenal know battle with Besiktas is a season-defining fixture

Arsene Wenger admits his below-strength side will have to improve on last week’s show to pass tough test
Pete Jenson: Athletic Bilbao’s locals-only transfer policy shows success does not need to be bought

Pete Jenson: A Different League

Athletic Bilbao’s locals-only transfer policy shows success does not need to be bought
This guitar riff has been voted greatest of all time

The Greatest Guitar Riff of all time

Whole Lotta Votes from Radio 2 listeners
Britain’s superstar ballerina

Britain’s superstar ballerina

Alicia Markova danced... every night of the week and twice on Saturdays
Berlin's Furrie invasion

Berlin's Furrie invasion

2000 fans attended Eurofeurence
‘It was a tidal wave of terror’

‘It was a tidal wave of terror’

Driven to the edge by postpartum psychosis