Germany’s Finance Minister implies that the Ifo Institute has miscalculated the costs arising for Germany were Greece to declare insolvency by equating risks with budget losses. The Ifo Institute rejects this criticism since it made no mention of budgetary impact in this context.
Instead, Ifo Institute’s press released of 25 July 2012 stated that:
"Should Greece become insolvent and exit the Eurosystem, Germany would face losses of up to 82 billion euros. If, on the other hand, Greece were to become insolvent and remain within the Eurozone, Germany must reckon with losses of up to 89 billion euros ."
These statements are correct. The method used to calculate the above amounts can be verified and is presented in the press release:
"Ifo Institute calculates potential losses for Germany and France if Greece declares insolvency".
The Ifo Institute has also conducted and published in-depth background research into this topic (Ifo Policy Issue: Target Balances).
The Ministry of Finance disagrees with the calculations as far as the Bundesbank’s potential losses are concerned, which are included by the Ifo Institute in its calculation and which account for the greatest share of total German losses. In the case of Greece’s insolvency and exit from the Eurozone this concerns potential:
- Losses arising from the German share (12.4 billion euros) in the Greek sovereign bonds purchased by the ECB
- Losses arising from the German share of the Greek Central Bank’s Target liabilities stemming from its granting of loans to the Greek banking system (20.7 billion euros), that go beyond Greece’s own liquidity supply and
- Losses arising from the German share in Greek central bank liabilities due to its disproportionate distribution of euro banknotes (4.8 billion euros).
All of these losses are incurred by the Bundesbank. It is true that they do not have a direct effect on the budget, since there are various ways in which the Bundesbank can spread out the impact of Greece’s insolvency over time. However, they are real insofar as they reduce the Bundesbank’s distribution of profits to the federal budget, and may even force recapitalisation of the Bundesbank using tax revenues.
The Ifo Institute calls on the German government to stop obscuring the potential German losses arising from the Bundesbank’s Target credit from the general public. This credit represents by far the biggest risk in the so-called euro bail-out, but is not controlled by Europe’s parliaments, and has arisen due to insufficient collateralisation of refinancing loans to banks that has been permitted by the ECB Council. Bundesbank President Weidmann expressed his concern over Target-related risks in a letter to ECB President Draghi written in February. The Ifo Institute shares his justified concern. Target credit has continued to rise steadily recently and at around 730 billion euros, it now accounts for three quarters of Germany’s net external assets. This sum represents a corresponding share of German citizens’ savings, which have flowed from the banking system via the Bundesbank to the central banks of the Eurozone in the form of publically guaranteed loans.
As a research institute funded by the federal state and the Länder, it is the Ifo Institute’s mission and responsibility to uncompromisingly inform politicians and the public about the real risks of Greece’s potential insolvency.
The President of the Ifo Institute has written a personal letter to Germany’s Finance Minister, declaring the Ifo Institute’s willingness to meet with him to discuss the economic and budgetary importance of Target credit and strategies for limiting related risks.