Germany needs to check its own debt problems

As German leaders lecture the UK over its debt problems and attitude towards the Eurozone, it is important to note that even Germany has a soft underbelly

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Looks mighty steely, but the Germans have a soft underbelly too
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Simon Miller
On 18 November 2011 12:35

Euro leaders are ratcheting up the rhetoric over the UK and its involvement within the union ahead of David Cameron’s meeting with Angela Merkel.

After a breakfast with the European Commission president, Jose Manuel Barroso (eggs, bacon and croissants if you really must know) and talks with Herman Van Rompuy, the EU president, Cameron headed off for talks with Merkel as tensions come to the boil over UK and German stances over what to do about the troubled Eurozone.

The talks come as Spain nearly reaches the 7 percent danger mark on its bonds, Italy yo-yos above and below the mark and France achieved its highest ever spreads on the German bund.

Contagion is spreading but Germany refuses to allow the European Central Bank (ECB) to become a lender of last resort.

Of course, Germany is right to worry that the fiscal incontinence of its southern partners will be let off if the ECB does start printing money and there is its cultural hangover about the effects of inflation. In addition, there is deep suspicion over debt transfer – although as I and many others have argued, for full union you need debt transfer.

But the actions of the ECB in buying Italian and Spanish debt does beg the question of whether the German public, let alone its politicians are aware of how much they are already on the hook for.

Germany already supplies 30 percent of ECB funds and would supply €465bn (£398bn) in the form of financial assistance to central banks in the peripheral countries. In addition, Germany guarantees €180bn in bond purchases by the ECB so far.

And that’s not all; there is also the €211bn share of the European Financial Stability Fund as well as the original Greek loan package of around $19.3bn.

Wait, we’re not done yet. Germany is also in hock for 6 percent of International Monetary Fund loans. To put this into context, the UK and France guarantee 4.9 percent while the US puts in 17.1 percent.

And yet Germany opposes debt transfer? It is already happening in the shadows as the ECB frantically tries to dampen the Italian and Spanish yields.

The thing is we keep hearing about German efficiencies and the need for a more Germanic approach to spending. So how’s that working out Merkel?

Germany was one of the first to break the 3 percent stability pact when it needed to and was the first to bailout its banks, albeit on the QT.

Merkel rightly says that debt is a problem and that sovereign nations had to deal with this problem. Yet, Germany’s national debt stands at 82 percent of GDP while the UK’s stood at 62.6 percent in September. 

If you look at what the markets are doing, especially in the Far East, they now doubt whether Germany is the safe option. Bond purchases are slowly shifting towards the US and repositioning themselves with German one-year paper rather than bunds.

Of course, with yields of 1.86 percent, Germany is still considered a good bet but what happens if one or more country collapses in the Eurozone?

Basically, if all Germany’s responsibilities were called in, we would be talking about Greek-levels of debt of around 120 percent or more. Even the powerhouse of Europe can show a soft underbelly.

And yet, the Eurozone don’t like to hear about this. They talk of ever-increasing union with ever-decreasing democratic rights.

We hear of attempts to block the UK’s rights as a sovereign nation, to tax the City – which they of course blame for the crisis in this impossible union – while making soothing tones that the UK would actually come closer, hell even into the euro, after the crisis has passed.

There is no point blaming perfidious Albion, or the markets. The bond spreads reflect the sticking plasters approach which the Eurozone subscribes to.

Any attempt at punishing the City through a Tobin tax would only damage Europe itself, shooting itself in the foot for the message markets bring.

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71 

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