Trade credit and Political Risk Event of Early September 2011: what more will Germany do?

Submitted by ICBA Asia, Brazil, India and the USA via the IRC Read & Delete Monthly

Angela Merkel’s German government has long been reluctant to bail out the profligate members of its currency union. But does she really have a choice? As of Year End 2010, German banks held nearly 760 billion Euros in long-term bonds from Portugal, Ireland, Italy, Greece and Spain (PIIGS). More than half of that exposure is to Italian and Spanish bonds. Governments usually have four options for managing the value of their currency in response to a debt crisis: inflate, deflate, devalue, and default.

Germany can react in only two ways: bail out PIIGS or bail out German banks. Unfortunately, the choice won't be easy. The German electorate wants to punish its spendthrift neighbors for their bad habits but Merkel doesn't want to preside over the decline of European economic cooperation or the fall of the Euro.

A 7 September 2011, Reuters article reported, “Germany's top court rejected a series of lawsuits aimed at blocking the participation of Europe's biggest economy in emergency loan packages but it handed the country's parliament greater say over euro zone bailouts.”

The ICBA blog will report further on European economies in crisis and how ICBA trade credit insurance and political risk clients can be better prepared. Follow the ICBA blog - subscribe via RSS!

(The Political Risk Event of the Month blog post will be a recurring post, on a sporadic basis, at the ICBA blog. ICBA Asia, Brazil, India and the USA, which is International Risk Consultants, Inc. (IRC), has agreed to continue to share these "event" posts with the ICBA blog.)