Germany, France May Face Bailout of Nations, Not Just Banks

Bloomberg reports that Germany, France may face bailout of nations, not just banks.

(emphasis mine) [my comment]

Germany, France May Face Bailout of Nations, Not Just Banks
By Emma Ross-Thomas

Feb. 18 (Bloomberg) -- Germany and France may be forced to contemplate the bailout of entire nations rather than just individual banks as European government budgets buckle under the weight of recession.

German Finance Minister Peer Steinbrueck became the first senior policy maker to broach the topic this week, saying some of the 16 euro nations are "getting into difficulties" and may need help. French officials are also concerned about market tensions as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen.

The nightmare for Angela Merkel and Nicolas Sarkozy is that widening deficits will prompt investors to shun the debt of some countries, sparking a region-wide crisis. While few investors are yet forecasting any defaults [I am], the mere risk of it may prompt the bloc's two richest economies to ignore the European Central Bank and announce their willingness to come to the rescue. [Absolutely disgusting. Why should responsible nations bailout the irresponsible ones?]

"When push comes to shove Germany, France, the larger players will bail out those smaller peripheral players," [No, they won't] said Alex Allen, chief investment officer of Eddington Capital Management. "You can't let one part of the system fail because it leads to failure of the whole system."

Allen's betting that the risk at least one nation will leave the bloc is higher than the market currently expects.

Swelling Deficits

European deficits have ballooned as governments from Berlin to Dublin committed more than 1.2 trillion euros ($1.5 trillion) to save their banking systems from collapse. The situation will be underscored by the European Commission today, when it publishes a progress report on budget policies at 11.15 a.m. in Brussels.

The European Union's executive arm forecasts a deficit of 11 percent in Ireland, 6.2 percent in Spain and 4.6 percent in Portugal this year. The euro region's average budget gap was just 0.6 percent in 2007.

European officials have already expressed concern that their bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers Holdings Inc. in September. ECB board member Lorenzo Bini Smaghi said Feb. 12 there's a "risk that the mistrust that there is today in financial markets" is "transformed into mistrust in states."

"I would be very reluctant to say: 'O.K., let Ireland or Greece default, the market will sort it out, punish them for their irresponsibility of the past,'" [Of course you would. Britain, your country, has been even more reckless than Ireland or Greece. The thought of actually paying a price for such recklessness must bother you.] said Thomas Mayer, co-head of global economics at Deutsche Bank AG in London. "They tried it with Lehman and realized that was not a good idea." [Lehman was the only thing the US did right.]

Bond Spreads

The gap between the interest rates Greece, Austria and Spain must pay investors to borrow for 10 years and the rate charged Germany yesterday rose to the widest since before they adopted the euro. Credit-default swaps on Ireland rose to a record on Feb. 16, climbing to 378.4 points.

Greek credit-default swaps, 270 points on Feb. 16, show a 4.5 percent chance that the country will default in the next 12 months, according to ING Bank NV.

Eddington Capital's Allen, who runs a fund of hedge funds, says the market currently "vastly underestimates" the risks and expects credit-default swaps for Greece, Italy, Spain and Portugal to double in the next 12 months.

Any state-funded rescues may meet with opposition from the ECB, which has repeatedly said the Maastricht Treaty forbids bailouts.

"The no bailout rule is an important pillar on which the European Union was founded," says Stark, who helped draw up the fiscal rules underpinning the euro.

No Bailout? [YES, NO BAILOUT]

At the same time, the treaty says that EU nations can grant financial assistance to a member state if a country is "threatened with severe difficulties" caused by "exceptional occurrences beyond its control."

"The member countries are working hard on a 'pre-emptive de facto bailout' to prevent the test of the "no bailout" clause," said Juergen Michels, an economist at Citigroup Inc. in London.

Part of the problem [the inability to recklessly print money to bailout the undeserving isn't a problem. It is the solution.] policy makers now face stems from the fact the currency union does not have a single treasury and relies on the Stability and Growth Pact, which has been breached in the past, to keep budgets in check. Billionaire investor George Soros said yesterday the region economy must confront the problem [it isn't a problem] posed by the lack of a Europe-wide finance ministry.

For now, finance officials say that market concerns are not justified. ECB President Jean-Claude Trichet said in Rome on Feb. 14 he's confident countries will work towards sustainable public finances.

State Rescue

Greek Finance Minister Ioannis Papathanasiou said three days earlier the extra interest rates on his country's debt were unjustified. Spain's Deputy Finance Minister Carlos Ocana categorically ruled out a default on Feb. 16, and the Irish Finance Ministry warned yesterday against drawing conclusions about public finances from the CDS market.

Steinbrueck's comments nevertheless suggest that views in Berlin are shifting as the financial crisis worsens. [I hope someone like me set him straight.]

"In reality the other states would have to rescue those running into difficulties [No, they don't. This is just wishful thinking on the part of the reckless.]," he said Feb. 16. Steinbrueck said that Ireland was in a "very difficult situation."

"There will have to be some kind of support package for some of the smaller economies to avoid the tension and speculation about breakup," said Ken Wattret, senior economist at BNP Paribas
SA in London. "The bigger national governments will say this isn't our problem. But when push comes to shove they might need to provide some kind of financial support."

My reaction:

1) German Finance Minister Peer Steinbrueck has said some of the 16 euro nations are "getting into difficulties" and may need help.

2) Any state-funded rescues may meet with opposition from the ECB, which has repeatedly said the Maastricht Treaty forbids bailouts.

3) The no bailout rule is an important pillar on which the European Union was founded.

Conclusion: The bailout-happy US media are trying to fool themselves into believing Germany is going to rescue irresponsible EU members.

If this bailout of weaker EU members were in fact to happen, German citizens would once again experience the joy of using their currency as toilet paper.

This entry was posted in Currency_Collapse, Euro_Zone, News_Developments, Wall_Street_Meltdown. Bookmark the permalink.

3 Responses to Germany, France May Face Bailout of Nations, Not Just Banks

  1. BD says:

    No Bailout Rule in the Eurozone.... Would you like to place a bet if they follow the rules or not? Id bet a few silver coins that they break it or find away around it. :) These people dont follow any rules.

  2. Anonymous says:

    I think german which are the leader of the euro zone would be against it completly.

    Germany still struggle now after 30 years of the reunification of ex-RFA and RDA after the crumble of the wall of berlin.

    They know what it cost to support another country and most of the population would be clearly against such idea.

    But as the previous comment said, I still do not except politics to play the game "fair play".
    It is difficult time, and they will most likely take actions that seems "appropriate" even if officially it is not possible.

  3. Robert says:


    BIS Data Misinterpreted - East Europe Not That Bad !

    Have a look at this article today on - the Austrians claim the Easter European debt problem is FAR SMALLER than feared - due to GROSS MIS-INTERPRETATION of Bank of International Settlement data.{F7C61CF2-FB3C-4373-B59C-92E0F41D5D30}

    If their contention proves correct - perhaps the Euro should be revisited in light of this ?

    Robert Lahey

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