Germany Shows Leadership (?)

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.”

17 thoughts on “Germany Shows Leadership (?)

  1. What interests me is why the Mr. Steinbruch made such a statement in the first place. Is he worried that Ireland will trigger a great European fall?

  2. When German officials talk this way, I’m never sure whether they’re trying to head off a EMS/euro crisis or start one — in hopes of shaking out the riff raff (Ireland, Greece, etc.)

    Maybe it’s because I always have the suspicion that most of them secretly still want the old DM back.

    In other words, is this 1992 all over again?

  3. At a guess it sounds like Peer Steinbrueck wants a breathing space but expects bailout reality to be the opposite,

  4. The German Treasury is apparently not in the hands of the financial oligarchy. My favorite Steinbrueck sentiment: bank managers still lack a sense of social responsibility. His ministry’s “bailout”, now at least 2 months old, is an offer. Banks that accept the offer and receive taxpayer support, e.g. Commerzbank, must agree to limits on management compensation and other interventions. The government’s attempt to stimulate new-car sales – people who trade-in an old car and buy a new one get about 2500 Euros – is working. Citroen and Puegeot have been the big winners so far. There’s no “Buy German” clause in the legislation. ECB monetary policy will probably benefit Germany and France before it benefits Ireland and Iceland – worries that the Germans secretly want the DM back are hairbrained – but maybe there’s a good reason for that.

  5. A European perspective:
    The German coalition Government has been behind the curve for the past year. Steinbrueck’s sudden change of religion suggests to me that AG Deutschland is finally beginning to understand that the EU/EMU will survive or fail together.

    In my view, there is no coincident that his comments come right after G7. G7 was by most commentators viewed as a failure (the communiqué is taste- and toothless). I would not be surprised if the most important outcomes of the G7 were kept out of the press release. In any event, Steinbrueck’s comments will mean that the EU bureaucracy can proceed with creating blue-prints, legal and economic, for a common EU fiscal resource.

  6. You say that “over the past two years, this same CDS market has given us an accurate read on the dangers ahead.” Is that really the case? Or has the CDS market simply allowed speculative bets to become self-fulfilling prophecies?

  7. Just having a little fun with stereotypes, Joe. (My own ancestry includes some Irish. Although I would make the same sort of joke regardless because I have a sense of humor, thanks.)

  8. hi! german irish american here.
    so when do economists and TPTB start to talk seriously of voiding all cds contracts. Force Majeure or whatever. its game over time.

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