Is the Bundesbank against an IMF-enabled bailout of Greece?

It seems the wheels are coming off the European experiment. Yesterday, we had a huge meltdown in Greek bonds. Media reports suggest that a recent article in German daily Frankfurter Rundschau are what triggered the latest selloffs in Greek sovereign debt (See the Telegraph’s account here; hat tip Swedish Lex). This article leaked portions of a Bundesbank report which demonstrated its vehement opposition to the joint EU-IMF bailout cobbled together by Angela Merkel and Nicholas Sarkozy.

The Bundesbank paper goes as far as to suggest such an aide package is unconstitutional. However, it also indicates that it fears the IMF will be less stringent than the Eurogroup, something that flies in the face of all logic. To me this suggests an institutional bias against a bailout for which the internal memo provides intellectual cover. Clearly, this level of institutionalized opposition to a bailout in Germany makes a bailout less likely, even with IMF involvement.

In the interest of bringing you this perspective, I have translated a portion of the article below.

The German Bundesbank picked apart the EU rescue plan for Greece which was largely designed by the German federal government. According to an internal document which the Frankfurter Rundschau has obtained, the high priests of the Stability and Growth Pact fear  that the International Monetary Fund (IMF) would require less financial discipline of the Greeks than would the Eurogroup.

"This decision by the heads of state and government of the Eurogroup, which, to our knowledge was made without the involvement of relevant central banks, bring problems with it, which cannot be underestimated from the point of view of policy stability," says the board document. The Bundesbank confirmed the document’s existence but tried to play it down; it was an unauthorized paper which a mid-level functionary out together as a first reaction to the decision. "The process to form an official opinion has not yet taken place," said a spokesman.

The paper rips into the generally public-praised rescue operation for Greece with the intervention of the IMF. This solution leads neither to adherence of the Maastricht treaty nor to a situation in which no German money would flow to Athens. On the contrary, in the end the Bundesbank will deliver the euros with which the IMF helps Greece.

The Bundesbank criticises the involvement of the IMF also because the days are gone in which the Fund considered fiscal discipline of the highest virtues for policy and forced aid-seeking countries into a strict privatization course. Ever since the Frenchman Dominique Strauss-Kahn took over the post of Executive Director at the end of 2007, the IMF has changed course. "The extreme market orientation has been abandoned," says finance professor Marcel Tyrell of the Zeppelin University in Friedrichshafen.

I should stop here because it goes on in this fashion for some time. I think you get the picture. Regardless of whether a Sachbearbeiter (mid-level functionary) wrote this paper, it accurately reflects the view of many in German policy circles.

The full German version is linked below.


Bundesbank contra IWF – Anna Sleegers, Frankfurter Rundschau

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Jim

    Huge meltdown in Greek bonds, is only a huge problem for the Greeks & to a lesser extend the other weak sovereign borrowers.
    Not a huge problem for Germans, so there opposition makes sense. Why would they allow Greece just to kick the problem down the road again – using German tax payer money?

    Greeks need a well planned limited default. And the other weak sovereign borrowers should be looked in a case by case basis.

    Greek people bear the most responsibility for this. Same as the Irish are responsible for there own position.

    1. Edward Harrison Post author

      That’s not really true.

      Sovereign bond contagion seems to be lessening. But if the Greeks default, there will be a lot of writedowns (mostly at Greek banks). These writedowns get transmitted to German, Swiss and other banks via their exposure to Greek banks. And there are plenty of other externalities like Greek bank exposure in the Balkans and the impact on credit availability there. Let’s not forget CDS exposure because the rumor is that German banks were writers of a lot of Greek sovereign CDS.

      As with the subprime problems which surfaced in villages in Norway, there are a lot of interconnections we are not seeing.

      1. Captain Teeb

        Agreed that there are lots of interconnections of the sort that were used to justify the AIG bailout. The moral-hazard problem is that these agents took chances and now will expect to be bailed out, Paulson style.

        Why did German and French banks buy Greek bonds? Answer: they paid higher interest than their own countries’ bonds. And why the higher interest: because of the implied default risk. It was easy money while the going was good, and now this going is less good. If we bail them out, well, as Tim G. says, “We had to do it”.

        If we subsidize risk-taking, then more risk will be taken, up to the point where the subsidy is no longer forthcoming. We (I live in Northern Europe) can choose that point, or wait for it to choose us.

        I say to Germany: the tipping point is coming. Better to choose the timing yourself, as at least you can brace for the shock.

        1. bobh

          But they can’t let a Greek default happen. That would be a terrible precedent and a blow to the traditional IMF master plan for dealing with sovereign debt houses-of-cards as they begin to wobble: shrink the offending country’s middle class and force it’s working class to adapt to third world standards of living so bankers don’t have to take a loss. If you let Greece default, pretty soon the USA will be thinking about it as our own debt mountain grows. Better to send all of our unemployed down to West Virginia and let them chop coal for twelve hours a day in return for a warm hut to sleep in. That would be an economic stimulus.

    2. Glen

      Greek government surely (although there is some evidence that the debt was concealed from even the latest leaders) is responsible. I doubt if you’ll find the names of any Greek people attached to these bonds. The Greek people are the suckers in this morality play.

      What’s interesting is that nobody is talking about GS’s role in this whole mess anymore. Too bad, there aren’t many “banks” that can brag about taking down a whole country!

  2. kevin de bruxelles

    I’m not sure why the fact that a mid-level bureaucrat in the Bundesbank recognizes that the EU agreement in March was but a temporary band-aid means that “the wheels are falling off the European experiment”. In fact it would be much scarier if someone at the Bundesbank was clueless enough to actually believe that the EU-IMF intervention was a good idea. The only thing that will kill the European experiment is a mindless TARP-like bailout of Greece by Germany.

    There are only two ways this works out. Either the Greeks get it together in record time and work their way through this on their own, or the far more likely result is that the Greeks default and stay in the Euro. In this latter case each nation would then need to sort out the mess caused to their respective banking systems. So the Germans will soon be paying, only it will be internal bailouts and not external. The Daily Telegraph would obviously prefer to see Germany bail out Greece now than to have the British government bail out the resulting mess to the British banking system later.

    1. Edward Harrison Post author

      kevin, there was no cause and effect implied. The first sentence is a statement that does not imply the wheels are coming off because some mid-level functionary deems it to be so. The wheels are coming off because the eurozone is unworkable as it has been designed.

      1. Kevin de Bruxelles


        I’m all for more European political and economic integration but in the back of my mind I can’t help but wonder if that would have served any further purpose during this crisis. In other words would the EU having the power to bail out Greece really have helped the situation? I would be really interested in hearing your ideas as to which policies Europe should be enacting and which changes should be made to the existing political architecture of Europe.

        As it is I think Europe is in generally good shape. The Anglo-Saxon economic model of borrowing, importing, and real estate bubbling your way to prosperity, which was adopted to varying extents by Greece and Ireland and to a lesser extent by Spain and Portugal has been totally discredited. Ireland, Spain, and Portugal are making the necessary adjustments while Greece will most certainly fail. But what could Europe have done to avoid this? Further economic monitoring beforehand to stop Greece before things reached a crisis point? Perhaps. A Eurobond market? This would be a good idea but at this point it would only prolong the Greek problem.

        In the end further government powers are only helpful if there are actions that these empowered governments can take to alleviate the crisis. We see in America that a government that holds powerful tools can easily be high-jacked by powerful private interests. I am hopeful that Europe will evolve into a closer union as a result of Greece’s eventual defaulting but I am also relieved that no morally hazardous decisions have yet to be taken.

        1. Arciero

          “The Anglo-Saxon economic model of borrowing, importing, and real estate bubbling your way to prosperity, which was adopted to varying extents by Greece and Ireland and to a lesser extent by Spain and Portugal has been totally discredited.”

          But it was created by having a one size fits all currency and interest rate policy.

          “Ireland, Spain, and Portugal are making the necessary adjustments while Greece will most certainly fail.”

          Ireland, yes. Spain, no. Portugal, I don’t know enough. Agree on Greece.

          “But what could Europe have done to avoid this?”

          Not have a one size fits all currency and interest rate policy.

  3. Vinny

    Well, Europe needs to decide whether to move past the petty nationalism and act as one. Failing that, each countty might as well prepare to go its own way. However, if Germany thinks it can compete with China or Japsn on the global scale without the EU to buy its inferior products, then think again. The fact is, Japan makes better cars, and should Germany continue to snob the rest of Europe, even the Club Med countries will prefer a quality Tohota or Honda over some German piece of garbage made in Mexico. Germany without the EU is nothing but a small and weak nation – time to wake up and put that German ego aside and subdidize your own marke. Time to give something back.

    So, Angie, it’s time to pay the Greeks if you want us to continue to buy your inferior Mercedeses made in Mexico. And it’ not only the Greeks. It’s Spain, Portugal, and Eastern Europe as well. Pay up or else…


    1. Vinny

      Sorry about all the typos in my previous post. It’s tough typing on an iPhone in this bright sunshine here on this Greek beach (the type of weather for which Germany better fork over 30 billion Euros pronto… Otherwise, go to the beach to the North Sea, you selfish Fritzes, you…lol)


        1. Vinny

          Hey PJM,

          Send me a box of that Porto. I’m getging tired of this cheap Metaxa.

          Oh yeah, after 15 years of living in New York and Chicago, one can’t help being a little racist… but only against the Germans… because they work too hard and make the rest of us look bad… :)


          1. PJM

            Well, if you dont like to work, you must to drink our Ouzo. We call that “bagaço com aniz”, because some centuries ago islamic winemakers (alquimistas) came to Portugal and teached us. is good for who doenst like to work. ;)

  4. PJM

    For those who dont understand european politics, let me tell this:

    Iberain tape is tellig me: buy today, sell monday, on the news. ;)

    Lets see if it will be a good call from iberain equities.

    1. PJM

      Poor american guy. Some american hedgefund was shorting iberian banks. The guy has been squeeze in the last 3 hours.

      He must to learn more about politics and iberian markets. The arent dumb as some think.

      Well, iberian speculators need dollars, to equilibrate capital balance. ;)

  5. Cathryn Mataga

    Maybe they did the math and just figured
    default was inevitable. In that case,
    they could have decided that it’s
    better to experience the pain now
    rather than later, when the bubble is
    even larger.

    Of course,I guess this means all the banks
    go through another round of implosion.
    This could be interesting to watch.

  6. FP

    It’s once again an issue of risk sharing. It’s exactly like Captain Teeb says: the German and French banks bought the debt because it was good money – when you buy it, you have to share responsibility. ECB also has to bear responsibility for creating a Ponzi scheme system: Greek banks got 1% interest loans from ECB by using Greek bonds paying 3-4% as collateral. Meanwhile, the previous government concealed the debt – we thought it was as low as 4% up until summer 2009. One should also not forget the fact that when France and Germany pretty much oblige Greece to buy their defense products (we buy 17% of German defense output) in much higher prices than their Russian equivalent, paying with loans issued by French and German banks, there will be a day of reckoning.

    So once again, a handful of people caused all this, and they are unwilling to pay.

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