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Bailing out Germany: The Story Behind the European Financial Crisis

by Pratap ChatterjeeCorpWatch Blog
May 28th, 2012

Translation: The Rich Get Richer. Stop Poverty Wages! (Photo of Blocupy poster: linkskreativ. Photo of Euro: Slolee. Used under Creative Commons license)

Bankia, Spain’s fourth largest bank, asked the government for a €19 billion ($24 billion) bail out on Friday night.  Four Greek banks - Alpha Bank, Bank of Piraeus, Eurobank and National Bank of Greece – were together given €18 billion ($23 billion) from their government last week also.

The sudden economic crash in several southern European countries: Greece, Italy, Portugal and Spain as well as Ireland (sometime called the PIIGS, a rather dubious and perjorative name); is commonly blamed on lazy workers, a bloated social security system and unwise borrowings by greedy governments. This is why lenders like the European Central Bank (ECB) and the International Monetary Fund (IMF) are now asking these governments to cut social spending (austerity measures) and pay ever higher interest rates, despite the fact that only serves to make the situation worse.

"As far as Athens is concerned, I … think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax," Christian Lagarde, the French head of the IMF told the Guardian.

In reality, a large chunk of the bailouts are for debts created by private banks in Greece, Ireland, Italy, Portugal and Spain borrowing abroad – for speculative real estate schemes and such like - not by shopkeepers, small entrepreneurs and ordinary citizens. And a surprisingly big chunk of the rash loans were handed out by private (and some public) banks in just four countries: France, Germany, the UK and Belgium (in that order).

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 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.

The BBC’s Laurence Knight notes “Madrid was in the process of paying its debts off - it earned more in tax revenues than its total spending. In contrast, Berlin regularly broke the maximum annual borrowing level laid down in the Maastricht Treaty of three percent of GDP.” Interestingly, so did France and the UK (the latter isn’t bound by the treaty).

Second, who was lending the money that is now so difficult to pay back? After all it takes two to tango, as they say. Borrowers and lenders share in the risk and the blame.

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.

(For more details the BBC has an excellent graphic tool that shows which country was borrowing from whom: Spain’s biggest creditor is Germany at €131.7 billion ($171.2 billion) and Portugal’s biggest creditor is also Germany €26.6 billion ($34.6 billion). The Greeks owed most to France at €41.4 billion ($53.8 billion).

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. It is true the borrowing countries don’t have to take these conditional loans, they can also borrow at market rates but this can be very expensive: they have to pay between 5.5 percent (Italy) to an astronomical 30 percent (Greece) in interest for 10 year bonds.

“The euro-zone crisis is often framed as a bailout that rich, responsible countries like Germany have extended to poor, irresponsible countries like Greece,” writes Ezra Klein in the Washington Post.

In reality this crisis is at least partly (perhaps mostly) the fault of the banks in the wealthy countries like France and Germany and it is these banks that have really been bailed out by the ECB and the IMF.

The Indignados in Madrid, Blockupy in Frankfurt and Occupy Wall Street have it right.