Friday, June 01, 2012

Euro crisis: how eurozone taxpayers are bailing out German banks while strangling Greece, Ireland, Italy, Portugal and Spain

I allowed my subscription to Business Week to expire not long after Bloomberg took it over and made it Bloomberg Businessweek.

But I was impressed by a post by Ryan Chittum in the CJR Audit blog recently, Bloomberg BusinessWeek Cuts the Guruspeak 03/30/2012, in which he wrote, "The last thing you’d say about BusinessWeek these days is that it's hidebound. I have to read a lot of business journalism for this job, obviously, and much of it's a chore. Not BusinessWeek."

About the same time, BBW was sending me special offers to resubscribe for cheap rates. And as much digital reading as I do, I still have a fondness for the occasional hardcopy magazine. So I resubscribed.

Since then, I've developed a new love-hate relationship with the magazine. The 05/28-06/03 issue that arrived Friday has a cover feature on the euro crisis. The lead article by Clive Crook, "Who Lost the Euro?", might have been good if the writer understood the difference between fiscal and monetary policy or had some reasonable superficial knowledge about EU governance structure work or had a decent grasp on what generated the current set of problems, none of which are evidently the case. At this writing, it seems to be the only one of the cover series that is not online at the BBW website. (Another grump: the full magazine was available online to subscribers from sometime in the 1990s until sometime after Bloomberg took over. And the navigation isn't as user-friendly; the search function kind of sucks, for instance.)

However, the non-Clive Cook articles are pretty decent. This editorial, Bloomberg View: Germany's Banks Must Assist in Europe's Cleanup (hardcopy title, "Germany's Banks Helped Create This Mess. Why Not Hand Them the Broom?"), explains how the European taxpayers have probably been subsidizing the German banks during this crisis to a far greater extent than German taxpayers have been supporting Greece. This has to do with something that probably only finance or accounting geeks could actually enjoy reading about, which is central bank credits and debits on the central banks' books that are required to balance the national books of the eurozone countries. To oversimplify what still seems like an obscure accounting quirk even with the editorial's longer explanation, in effect, other eurozone national banks loaned the Bundesbank (German central bank) money to enable German banks to pull money out of Greece. As BBW sums it up: "In short, over the last couple of years, much of the risk sitting on German banks’ balance sheets shifted to the taxpayers of the entire currency union."

The sovereign debt crisis has always been fundamentally about the weakness and irresponsibility of giant European banks, German banks not the least among them.

The BBW editorial explains how the subsidies to German banks via central bank accounting - which represent binding commitments to the Bundesbank by other eurozone central banks - compares to the aid Germany has given Greece:

It's hard to quantify exactly how much Germany has benefited from its European bailout. One indicator would be the amount German banks pulled out of other countries since the crisis began. According to the BIS, they yanked $353 billion from December 2009 to the end of 2011 (the latest data available). Another would be the increase in the Bundesbank'’s claims on other central banks in the euro region over the same period. That amounts to €466 billion ($586 billion) from December 2009 through April 2012, though it would also reflect non-German depositors moving their money into German banks.

By comparison, Greece has received a total of about €340 billion in loans to recapitalize its banks, replace fleeing capital, restructure its debts, and help its government make ends meet. Only about €15 billion of that came from Germany. The rest is from the ECB, the European Union, and the International Monetary Fund. [my emphasis]
Now, it's also true that the ECB and the IMF are partially supported by Germany. But the basic point is valid. Germany is getting a lot of financial guarantee from other eurozone countries in order to allow Germany's banking corporations to pull funds out of Greece and other debt-crisis countries.

That is a central reason why the "aid" to Greece the last couple of years has been disastrous for its economy. As Christine "Madame Scrooge" Lagarde of the IMF made clear with brutal frankness in her recent interview with The Guardian, the only goal that has meant anything to the IMF - and the same is true of the German/EU/ECB aid - has been to save the giant private banks from the consequences of their own lending decisions. And to do so at the expense of the general taxpayers and by grinding millions of Greeks, Irish, Italians, Portuguese and Spaniards into poverty and even destitution.

The BBW editorial addresses Angela Merkel's Calvinist moralistic justification for the bandit policies Angie is imposing on those countries:

What the widely accepted European morality tale ignores is that irresponsible borrowers can’t exist without irresponsible lenders. Germany’s banks were Greece’s enablers. Thanks in part to lax regulation, German banks built up precarious exposures to Europe’s periphery countries in the years before the crisis. By December 2009, according to the Bank for International Settlements, German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal, and Spain, far more than German banks’ aggregate capital. In other words, they lent more than they could afford.
Angie's Calvinist Social Darwinism is only for the masses of the citizens of countries that fall under her thumb: certainly not by reckless giant German banks being subsidized in their recklessness and rescued from the consequences of it by the eurozone taxpayers.

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