In her speech at the Davos World Economic Forum, Chancellor Angela Merkel warned that Germany might be overwhelmed by its efforts to bail out the Eurozone. Germany must not make promises that in the end can’t be kept, she said. It doesn’t make sense to demand a doubling or tripling of Germany’s contribution. “How long will that remain credible?” she asked.
The government’s reluctance has made Germany the favorite punching bag of the economic world, and most certainly of George Soros, who mused in Davos: “It’s Germany that dictates European policy … the trouble is that the austerity that Germany wants to impose will push Europe into a deflationary debt spiral.”
But demands for more money never cease. EU Finance Commissioner Olli Rehn, also hobnobbing in Davos, stated that even the second bailout package for Greece, €130 billion, wouldn’t be enough to deal with Greece’s collapsing economy and mounting pile of debt. Every few months, the amounts to bail out Greece are rising. But it’s not just Greece. Other countries are on life support as well.
And so the bailout mechanisms have become a bewildering and expanding array of direct and indirect contributions, commitments, and guarantees that, theoretically, all 17 member states of the Eurozone would share proportionately. But five of them—Portugal, Ireland, Italy, Greece, and Spain—are in trouble. So the remaining 12 have to shoulder their burden, and some of them are teetering.
Now all eyes are on Germany. CESIfo, the Munich-based economic research group that publishes the closely-followed Ifo Business Climate index, has put a pencil to Germany’s maximum exposure over time, given today’s commitments. In addition to the bailout mechanisms, the report takes into account Germany’s exposure through its 27.1% share of the ECB and its 6% voting rights of the IMF. Total exposure: 635 billion ($831 billion), a whopping 27% of Germany’s GDP. And it doesn’t even include any bailouts within Germany. The details:
– €22 billion for the first bailout package for Greece, agreed upon in May 2010. The Eurozone would contribute €80 billion and the IMF €30 billion—to be paid out in tranches. Hiccups developed immediately. Slovakia didn’t participate. Ireland and Portugal dropped out as both were put on life support. Germany’s share is based on its share of the ECB (27.1%).
– €1.8 billion for Germany’s share (6%) of the IMF’s €30 billion contribution to the package.
– €12 billion for the European Financial Stability Mechanism (EFSM) of €60 billion, established in May 2010—based on Germany’s 20% share of the EU budget.
– €253 billion for the European Financial Stability Facility (EFSF), established in June 2010 and enlarged in October 2011 to €780 billion. Germany’s share is 27.1% (based on its share of the ECB), or €211 billion. Also included is the 20% increase allowed under German law.
– €15 billion for the IMF’s €250 billion commitment to the EFSF. Germany’s liability is based on its 6% voting rights of the IMF.
– €94 billion for the ECB’s purchases of sovereign bonds. The “Securities Markets Program,” launched in May 2010, has grown to €219 billion. Germany’s exposure is composed of two factors: its share of the ECB (27.1%) and its portion of the share of Portugal, Ireland, Italy, Greece, and Spain, which won’t be able to fulfill their commitments to pay the ECB for losses. For a total of 43%.
– €237 billion through “Target2.” Target2 and its predecessor “Target” were a mundane part of the ECB’s interbank payment system. The ECB would temporarily borrow money from the central bank of one country and lend it to the central bank of another. In 2008, however, as capital flight from periphery countries began, the credit flow became one-sided and ballooned with each new outbreak of the debt crisis. Thus, these once ordinary credits became the first de facto bailout of crisis-struck countries. By November 2011, total amount in credits extended to the central banks of Greece, Ireland, Portugal, Spain, and Italy was €556 billion, according to Ifo.
Germany’s share of Target2 balances is based on its share of the ECB (27.1%). Since Greece, Ireland, Portugal, Spain, and Italy won’t be able to bear their share of any losses, the remaining 12 countries would have to bear them proportionately, giving Germany 43% in total exposure to Target2 balances.
And so Merkel’s question—”How long will that remain credible?”—has become a litmus test for Eurozone bailouts. But bailouts take on a life of their own. In September 2008, Treasury Secretary “Hank” Paulson walked into the Capitol and threatened that the whole world would collapse if his demands weren’t met. Paulson’s extortion worked. So, Greek prime ministers imitated him. And now Christine Lagarde, managing director at the IMF, tried it too.