Germany Shows Leadership (?)

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Simon Johnson | Feb 17, 2009

In the discussion over whether or not Ireland and other eurozone countries face serious economic issues (e.g., as suggested by the credit default swap, CDS, market), we have been joined by an unlikely ally: the German Finance Minister, Peer Steinbrueck. To avoid any misunderstanding, here is the exact wording from Bloomberg this morning:

German Finance Minister Peer Steinbrueck said late yesterday that euro region countries may be forced to bail out members of the 16-nation bloc that face problems refinancing their debt.

While he didn’t name countries facing problems, Ireland is in a “very difficult situation,” Steinbrueck said.

It is true that the CDS market has its problems and may not always provide a reliable indication of trouble. This is the line being taken by Irish officials, reported in the same Bloomberg story:

Ireland’s Finance Ministry said it’s incorrect to draw conclusions about the “soundness of Ireland’s public finances” from credit-default swaps on Irish government bonds.

“The credit default market is small and opaque,” the Dublin-based Ministry said in an e-mail today. “Also it is generally used as a speculative tool by a small number of market participants to gamble on movements in the CDS market itself rather than to insure against default.”

But time and again, over the past two years, this same CDS market has given us an accurate read on the dangers ahead (my article on this question, written while I was at the IMF, is here). Ignoring warning signs on the grounds that they are “bad data” is dangerous.

A much better approach would be to address the underlying fundamental questions, and show everyone - clearly and persuasively - that Ireland is fiscally sound even with the contingent liabilities it has take on through guaranteeing bank liabilities.

If you are not in a position to so persuade people, then it is time to talk with your allies and close friends about the circumstances under which financial support may be available. Mr Steinbrueck’s words will not be appreciated in all quarters, but they are timely (and hopefully will not be retracted). In particular, he is right to address not only Ireland but all of the weaker eurozone countries, just as we have been doing.

Above all, do not get into the situation of Iceland, which had too much denial for too long, and abruptly approached its relatives for money late and in a manner that did not engender strong support.

Remember this cautionary tale. In early October 2008, after the Icelandic Prime Minister had been turned down for loans that would have prevented calamity, he remarked accurately and depressingly, “we are all going back to fishing.”

Originally published at the Baseline Scenario and reproduced here with the author's permission.

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Comments

outrageous! How dare he speak for us German taxpayers... I have lived within my means, whilst the Irish, Spanish and others have run about building themselves mansions... forget it! You bail them out, I start refusing to pay my German taxes!

Reply to this comment By Tobias, Berlin on 2009-02-18 03:06:13

Makes sense to me. These countries are the major export markets for Germany, and if your best customers go bust then you will feel the heat too. Anyhow, if Germany provides loans to these countries then they will be not cheap either, for example Herr Steinbrück could borrow money on the markets for 3% and lend them for 6% to Ireland, Spain or Greece. He would make a neat profit of 3% on such a transaction. Besides, any bailout is effectively a stimulus programme for the German economy.

Do expect more European integration as a result though. Any EU-wide bailout will require an institutionalised set up to monitor the countries that have received money. So the economic government that Sarkozy wanted for so long will become reality soon...

Reply to this comment By Ismail on 2009-02-18 03:25:30

A large part of the reason Ireland is in the difficulty it is is because of European interest rates being set by France and Germany to suit France and Germany with little consideration of other countries positions, this helped to build up the property bubble that is bursting. Germany isn't an innocent passive victim being taken for a ride, it used its power in europe to ensure its own interests were served and got itself into a stable position, Ireland got over-ridden by them and forced into a bubble. Even still Ireland doesn't need bailing out - it has a national debt less than half its GDP, it has years to get its house in order, 2 or 3 years of 8% deficits when most of that is capital spending is just fine. I'm glad German politicans are coming around though, the German foreign minister's expression of solidarity will be enough to get the traders in their offices in Frankfurt to lay off trying to gang up on Ireland and pick it off.

Reply to this comment By Anonymous on 2009-02-18 08:15:37

Looks like a great opportunity for Germany to cement its dominance of Europe by bailing out the weak members with conditions. All the while whinging about how much it is costing the German taxpayer.

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