German and French banks have exposures of around euro 800 billionto the debt issues of peripheral nations. The German and French states have indirect exposure through supportof various official institutions such as the European Union,European Central Bank, the International Monetary Fund and specialbailout funds. As of April, the exposure of the ECB to Greece,Portugal, Ireland, Spain and Italy was euro 918 billion and risingrapidly, driven by capital flight from these countries. German and French guarantees supporting the european FinancialStability Fund are around euro 200 billion each. |
Germany also has the additional burden via the Bundesbank s euro644 billion exposure to other central banks in the euro zone underthe TARGET2 ( Trans-european Automated Real-time Gross SettlementExpress Transfer System ), which is designed as a payment systemto settle cross-border funds flows. Surplus countries such as Germany have been forced to use TARGET2to finance peripheral countries without access to money markets asa way of funding trade deficits and offsetting capital flight.Germany is by far the largest creditor in TARGET2. The Netherlands,Finland and Luxembourg are the other creditors, with all other eurozone countries being net debtors within the system. Advocates of European unity believe greater monetary and fiscalintegration is the solution. They argue that the euro zone scurrent account is nearly balanced, its trade account has a smallsurplus, the overall fiscal deficit is modest and the aggregatelevel of public debt is manageable.
But integration would require mutualization of debt through theissue of euro zone bonds backed jointly or severally by all memberstates. Germany s and France s financial exposure would increasethrough their liability for euro-zone bonds. Germany s TARGET2 exposure would also continue to increase, at arate of euro 80-160 billion annually to finance expected tradedeficits in the rest of Europe. The increase in exposure may behigher if needed to finance budget deficits of weaker euro zonemembers and the anemic banking sector.
As political will for integration is lacking, Europe may be forcedto continue the current policy of partial solutions austerityand monetary accommodation by the ECB. As the troubled economiescontinue to be excluded from money markets, the debt of peripheralnations will shift to official institutions via bailouts, fundingarrangements and the TARGET2 system. Germany and France sfinancial liability will increase. Read more: Spain's credit rating cut to just above junk. Expensive solutions In the peripheral economies, continued withdrawal of deposits fromnational banks (a rational choice given currency and confiscationrisk) may necessitate either a Europe-wide deposit guarantee systemor further funding of banks.
A credible deposit insurance schemewould have to be around euro 1.3 trillion in size. A Europeandeposit guarantee system, provision of capital or further fundingof banks would potentially increase Germany and France s financialliability. If integration is not undertaken or the partial solutions fail,then some European countries will need to restructure their debtand potentially leave the common currency. Germany and France wouldsuffer immediate losses. A Greek default would result in losses toGermany of up to euro 90 billion.
France would suffer losses of upto euro 65 billion. Potential losses increase rapidly as more countries default orleave the euro zone. The greater the delay in default or departure,the larger the losses as the exposure increases. Austerity or default will force many European economies intorecession for a prolonged period affecting intra-European trade,including German and French exports.
If the euro continues unchanged, the effects may be cushioned bythe weakness of the currency, which will maintain exportcompetitiveness. But defaults and a breakup of the euro will resultin an increase in the value of the euro, at least in the shortterm, undermining German and French exports outside the euro zone. Defaults or partial breakup of the euro would also leave German andFrench banks with significant losses, potentially necessitatingstate support and further increasing the respective liabilities. Decisive early action forcing weaker countries to restructuredebt and perhaps leave the euro would have avoided getting tothis point in the crisis.
Like amputation of an infected limb, itwould have allowed the euro zone to weather the debt crisis.Unfortunately, the problems are now too big relative to the size ofthe economies and financial capabilities of the larger members,Germany and France. These two nations are now financially vulnerable, facing cripplingcosts irrespective of the course of events, and making iteconomically, financially, socially and politically difficult todeal with the problem. Satyajit Das is author of Extreme Money: The Masters of theUniverse and the Cult of Risk.
We are high quality suppliers, our products such as China Long Pulse ND Yag Laser , Er Yag Laser for oversee buyer. To know more, please visits Q Switched Nd Yag Laser.
Related Articles -
China Long Pulse ND Yag Laser, Er Yag Laser,