Germany is on course to become the eurozone’s Goldman Sachs. This could win the country admirers, but also make it some enemies.
Just before the worst of the sub-prime crisis in 2007, Goldman reduced its exposure to sub-prime mortgages. Sub-prime mortgage lender Northern Rock was not so lucky, suffered a bank run and was taken over by the British treasury, advised by Goldman.
Some were angry that Goldman had protected itself by selling out of a market it had previously supported. But Goldman’s results prove the move was also prudent.
Many years before the eurozone debt crisis in 2010, Germany reduced its reliance on borrowing in euros. Irish institutional borrowers were not so lucky, suffered bank runs and were taken over by the eurozone, led by Germany.
When Lehman looked like it needed a bailout in 2008, Anglo-American finance officials convened a last-minute debate on its future. JPMorgan had already taken over Bear Stearns. Bank of America was agreeing to take over Merrill Lynch. Neither of them needed a government takeover, but they could not absorb another bank.
For similar reasons, the only three investment banks who could buy Lehman – Goldman, Morgan Stanley and Barclays in Britain – declined. (article continues below)
The American federal authorities later forced protection on all of them. Lehman went bankrupt and was bought by Barclays and Asian bank Nomura. America and Britain bailed out crisis-hit consumer institutions – AIG, Citigroup, Royal Bank of Scotland and Lloyds Banking Group – using the $700 billion (£475 billion) Troubled Asset Relief Programme and equivalents.
Now Spain is looking like it will need a bailout in 2011; European finance officials are already debating its future. France and Italy both have huge liabilities. As some investors are even starting to wonder whether Italy needs a bailout, chances are they could not absorb the cost of bailing out another country themselves.
For similar reasons, the only European countries that could do it – Germany, the less indebted core nations, although certainly not Britain – would decline.
The federal eurozone authorities and the IMF will most likely force protection on all of them. Spain will take a payout of roughly £400 billion at least, with assistance from Britain and Asian sovereign wealth funds. The authorities will most likely restructure Greek, Spanish, Portuguese and Irish debt and may have to rescue crisis-hit European financial institutions with exposure.
In both cases, Goldman and Germany have so far escaped with minimal liabilities, despite previously supporting the market that caused the crisis in the first place.
In the scenario above, Germany would also, like Goldman, suffer the least economic impact and should be able to carry on with business as usual.
Much of the eurozone is likely to be as angry with Germany as some voters are with Goldman, although they are likely to vent their wrath on other governments and banks.
Germany and Goldman, on the other hand, can point to their prudence. Either way, let’s hope security at German-based institutions is strong.