June 25, 2011

The Value of the Euro

german-foreign-policy.com

The Value of the Euro  2011/06/21

BERLIN/PARIS/ATHENS (Own report) - Once again the EU is bowing to a German-French dictate by enacting the participation of private creditors to finance the Euro debt crisis. An agreement to this effect, reached last weekend between the German chancellor and the French president, was passed yesterday by the EU's finance ministers. Financial companies are to be called upon to make huge payments - but contrary to German demands - only on a voluntary basis. Berlin could have made the popular demand that banks provide the financing, because German credit and insurance institutions have begun to sell off a large portion of their Greek bonds, while their French rivals are still in a vulnerable position. Some members of the ruling parties' parliamentary groups are still calling for credit institutions to play the largest possible role in solving the crisis. In the meantime, German CEOs of export companies owing a large portion of their profits to trade within the Euro zone, and therefore benefiting from the Euro, are placing large-format ads in journals pleading to maintain the Euro.

On a Voluntary Basis
Last weekend, a new interim solution has been reached in the on-going disputes between Berlin and Paris over the concrete approach to the European currency crisis. Following their summit meeting, June 17, German Chancellor, Angela Merkel and French President Nicolas Sarkozy declared they had found a common approach in their dispute over another bailout package for Greece, which stands on the verge of national bankruptcy. Sarkozy said they had arrived at "the same opinion and approach."[1] Chancellor Merkel added that Greece's private creditors would now be called upon to shoulder their share of the costs of further crisis measures - but "only on a voluntary basis." There is simply no "legal basis for mandatory participation" of private creditors. This means, Berlin has relinquished its main demand, in which the private financial sector must make an obligatory contribution toward solving the crisis. A German parliamentary resolution with exactly this content had passed with an overwhelming majority. "We will naturally attempt to acquire a substantial contribution from private creditors," explained Merkel in Berlin on Saturday,[2] where various concepts are under consideration. They range from a prolongation of the expiration dates of the loans to the Greek state - which would reduce Greek reliance on remortgaging - to a "partial debt abatement" - in which the banks grant a remission on a portion of Greece’s debts.

Crisis Dynamics
Alongside the question of participation of private creditors, there was also dissention over German intentions to have the decision on concrete implementation of any crisis credits for Greece postponed until September. The domestic EU conflict constellation was similar to that in the Spring of 2010, when Berlin hesitated to implement concrete measures to confront the crisis. France and the majority of the other EU nations again vehemently disapproved. The postponement would have brought relief to the German budget, but it would also have precipitated the spread of the crisis to other highly indebted Euro zone national economies. "While we, for the sake of German domestic policy, try to convince private creditors to contribute, everything becomes more expensive," warns EU Council President Jean-Claude Juncker.[3] If private finance companies enter into mandatory contributions toward shouldering the costs of the crisis, according to this reasoning, the rating agencies would consider this a default in Greek payments, which would then provoke incontrollable crisis dynamics. A partial remission of Greek debts could enormously increase interest rates for the other Southern European countries and Belgium, because the finance market will no longer consider credits to states as relatively "safe harbors" for their investments. "The bankruptcy could infect Portugal and Ireland, and, because of their high debts, Belgium and Italy even before Spain," warns Juncker.

Successful Retreat
In addition, a "partial remission of debt" threatens to cause an imbalance in those European banks that are still holding a significant quantity of Greek state bonds. This is the real reason behind France's stubborn refusal to have the financial sector participate in shouldering, to any significant degree, the costs of the crisis. Because French financial institutions are particularly exposed in Greece, the Moody's Rating Agency recently threatened to downgrade the creditworthiness ratings of France's Société Génerale, Crédit Agricole and BNP banks. In December 2010, French financial institutions accorded Greece credits amounting to 56.7 billion Euros (to the state, private sector and banks), whereas German banks were only on board with a total of 33.9 billion Euros. Over the past few months German banks have - contrary to their promises made in May 2010 - been successfully reducing their stocks of Greek loans. In the course of a single year, according to the business press, reserves of Greek state bonds in German bank vaults were down 4.5 billion Euros to a mere 9.9 billion in March 2011.[4] Greek state bonds in the hands of German insurance companies is suffering a similar fate, melting down over the past twelve months from 5.8 billion Euros to 2.8 billion.[5] The quantity of state bonds in the private sector diminishes constantly due to their coming of age requiring payouts. These payouts are already being made from the first bailout package Greece received. German economics guru Christoph Schmidt considers that a Greek loan conversion is feasible for German banks, unlike their French counterparts. "In any case, the majority of German banks could withstand a partial debt remission."[6]

New Pressure
Also in view of the differences in risks for French and German banks, the dispute over last weekend's German-French compromise persists in Berlin. A large portion of the liberal-conservatives in the government coalition, as well as the opposition, are criticizing Merkel's "giving in" to Sarkozy and are demanding that Berlin adopt a more intransigent position. Bavaria’s Prime Minister, Horst Seehofer, immediately demanded that Merkel, regardless of her accords with Sarkozy, impose on the financial institutions a mandatory participation in shouldering the costs of the crisis. "It is high time for private creditors to begin to participate."[7] Members of the CDU and FDP even put the continuation of the governing coalition into question. The FDP parliamentarian, Frank Schaeffler threatened, "if the chancellor does not converge with the positions of the critics in both coalition parliamentary groups and show an actual participation of private creditors, the chancellor's majority will be in jeopardy."[8] The CDU parliamentarian, Klaus-Dieter Willsch added that, on the basis of the German-French compromise, it would be "difficult" to "rally a favorable parliamentary majority." The SPD’s finance expert Carsten Schneider, on the other hand, accused Merkel of having promoted the deterioration of German influence in Europe at a breathtaking, horrifying speed.[9]

Rescue Exports
In the meantime, top German and French managers have launched a campaign, in coordination with the German chancellery, promoting the maintenance of the Euro, as the common currency. Around 70 heads of companies, including a number of export industry heavyweights, such as the CEOs of Daimler, BMW, Telekom and Bosch, have joined this campaign. "A return to stable financial relations would cost many billions of Euros but the European Union and our common currency are worth this sacrifice," says the ad that appeared today, Tuesday, in the German "Frankfurter Allgemeine Zeitung" and in the French "Le Figaro."[10] In spite of a slight downward trend, the European common currency realm is still the most important market for the German export industry, accounting for 40 percent of its exports and 60 percent of its commercial surplus. The German heads of companies, who are now seeking to save the Euro, to safeguard these commercial surpluses, have played a major role in the escalation of the European debt crisis. (german-foreign-policy.com reported.[11])