Pratap Chatterjee | Bailing out Germany: The Story Behind the European Financial Crisis

June 5, 2012, Donagh, 1 Comment

Pratap Chatterjee | Bailing out Germany: The Story Behind the European Financial Crisis

Peter Böfinger, an economic advisor to the German government, put his finger on it when he told Der Spiegel last year: “[The bailouts] are first and foremost not about the problem countries but about our own banks, which hold high amounts of credit there.”

Let’s dig a little deeper. First were all the borrowing countries wildly spendthrift?

Here are some very instructive numbers: before 2008, the Irish and Spanish governments had borrowed less than Belgium, France, Germany and the UK. The Irish owed roughly 25 percent of gross domestic product (GDP) in 2007, the Spaniards owed 36 percent. Meanwhile the Belgians had borrowed 84 percent, the French and German government had taken out 65 percent while the UK was at 44 percent. The Portugese were at about 65 percent – same as the Germans – and Greece and Italy admittedly were at over 100 percent.

Who was lending the money that is now so difficult to pay back?

Well, Bloomberg took a look at statistics from the Bank for International Settlements and worked out that German banks loaned out a staggering $704 billion to Greece, Ireland, Italy, Portugal and Spain before December 2009. Two of Germany’s largest private banks – Commerzbank and Deutsche Bank – together loaned $201 billion to Greece, Ireland, Italy, Portugal and Spain, according to numbers compiled by BusinessInsider. And BNP Paribas and Credit Agricole of France loaned $477 billion to Greece, Ireland, Italy, Portugal and Spain.

How much of these loans were to the government?

The Economist has some interesting numbers - just $36 billion went to the governments of Greece, Portugal and Spain. The rest was loaned out by banks like Munich based Hypo Real Estate that distributed over $104 billion for property schemes.

Finally, who profits out of this?

Well, the German banks have since taken their money out: Bloomberg estimates that $590 billion was taken back after December 2009. But the debt remains so that is why the borrowing countries are forced to go to lenders like the ECB which in turn is getting it from the Bundesbank (the German central bank). The German government only has to pay an interest rate of 1.42 percent to borrow money for 10 year bonds, apparently the lowest they have ever paid. (The French are also doing fine at 2.42 percent)

The ECB money comes with strings attached – severe austerity.