Home > Main > German Taxpayers will pay for Greek and Ireland problems no matter what

German Taxpayers will pay for Greek and Ireland problems no matter what

May 24, 2011

One truth I do not see mentioned in the financial press is the fact that German taxpayers will be paying for a bailout of Greece and Ireland almost no matter what.

Unless the Eurozone follows Warren’s advice, Greece and Ireland will either writedown their debt in a negotiated settlement, or default and force bondholders to take a lesser amount, or the Euro will break up and these countries will default.  In any of these “acceptable” scenarios, the holders of the debt will take losses.  The holders of the debt are German banks, and to some lesser extent U.K. and French banks.

Specifically, the banks holding this debt are German Lundesbanks.  These are state associated, regional banks of Germany. They provide loans to mid-sized German businesses.   These banks are not exactly Fannie and Freddie, but their status could be considered to be similar in that they are closely associated with the government.

In other words, these banks will not be allowed to fail.   These banks will get bailed out.

So Germany has a choice.  They can remain in the Euro, and bailout Greece and Ireland directly.  Or they can let these countries default and the Euro breakup, and bailout their own banks when they become insolvent due to writedowns of Greek and Irish debt.

I would think they would consider the first choice – keeping the Euro going – would be better for them.  Germany can continue to dominate export markets with a dramatically underpriced currency, which is considered to be a good thing.  However, this scenario may result in unacceptable levels of inflation for Germany.

The political situation isn’t clear.  Nobody has explained to the German taxpayer they will be paying no matter what happens, so of course they are balking at paying for bailouts now.

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  1. Gary
    • TC
      May 24, 2011 at 3:43 am

      I’ll take a look.

      I was really only dealing with the “conventional wisdom” scenarios, because I think that only these conventional wisdom approaches are possible choices for the current political climate.

  2. Rick Karr
    May 24, 2011 at 9:36 am

    A little different from Fannie and Freddie, in that they’re actually _State_ owned, as in owned by the individual Laender* (states) of the German Federal Republic. So they’re more like something that’d be owned by Illinois or New York. Another key difference? They’re really the capstone of the “Sparkasse” system of cooperative savings banks, so they have indirect relationships with individual Germans. (At least moreso than F&F do individual Americans….)

    * Hance “Landesbank”, not “Lundesbank”.

    • TC
      May 24, 2011 at 2:41 pm

      Exactly! I was writing this while nearly falling asleep. Hence Lundesbank instead of Landesbank.

      I didn’t mean they were exact mirrors of Fannie and Freddie, only that they were state “approved” lending vehicles that will not be allowed to fail on any massive scale, much like fannie and freddie are involved in what appears to be an ongoing bailout.

      They are heavily involved in the lending to the mid-sized companies that are favored by the entire German state apparatus.

  3. Kris Smith
    May 24, 2011 at 6:30 pm

    Of course if you let them die on the vine & exit the euro, this is the last time you have to eat it. History suggests these peripheral countries will be back for more a few years down the road.

    This is going to happen again. Without a deeper political union and centralization of the long term liabilities of the states, they need the monetary flexibility to inflate their way out of these messes. Try selling that in Germany right now.

    • TC
      May 25, 2011 at 1:49 am

      But if they do that, the new German mark trades at the equivalent of 2.00 EURUSD. It’s a one time bailout with economy destroying costs.

      Greece is a serial defaulter. They will require another bailout. Unless Europe goes to a full fiscal union and true fiat currency, the Euro countries are doomed to a never ending series of choices between bad and horrible.

      It’s like a personal version of hell for each country. Germany will have 5% inflation – which is all but hyperinflation to the sound money Germans – and have to pay for bailouts. Greece will have 5% inflation – which is too low to help them get out from under their debt load – and 20% unemployment. There is no possible way to make these problems go away. The solution for one country aggravates the problems in the other country.

      Hey, I am not saying that this is a good thing that the German taxpayers will end up paying. Only that they will end up paying, and nobody wants to tell them.

  4. Paul Casaul
    May 24, 2011 at 7:12 pm

    The real story behind the Strauss Kahn arrest and the euro bailouts, mega finance and power politics http://www.larouchepac.com/node/18252

    • TC
      May 25, 2011 at 1:51 am

      Hmmm. Larouche. I am sympathetic to the setup theory, because it is clear that he checked out before the alleged incident happened. But Larouche? I may need a comments policy.

      • beowulf
        May 25, 2011 at 7:19 pm

        Hmm, sounds like something his arch-nemesis would say– and yes, I do mean… Abba Lerner. :o)

        <i<On Dec. 2, 1971 an encounter took place at Queens College, in New York City, which shook the international financial community. Economist and political leader Lyndon LaRouche faced off in debate against the leading Keynesian economist Abba Lerner…
        http://www.larouchepub.com/other/2004/3110abba_lerner.html

        • TC
          May 27, 2011 at 3:30 am

          lol

  5. michael
    May 26, 2011 at 9:28 pm

    Why can they not print Euros like Ben here?

    • TC
      May 27, 2011 at 3:29 am

      They can print Euros like Ben, but one of the core premises of MMT is that monetary policy doesn’t matter, or matters less than fiscal policy. Europe is fiscally constrained by the Stability and Growth Pact.

      http://en.wikipedia.org/wiki/Stability_and_Growth_Pact

  1. June 7, 2011 at 7:08 am
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