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

May 24, 2011 13 comments

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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