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Are Some Countries Paying Less in European Bailouts?

April 19, 2011

In recent days, concerns have risen that Greece will soon restructure its government debt.  As a result, interest rates on Greek debt have again increased, as investors worry that the debt they buy today will be worth less later due to a potential decision by the Greek government to pay less than its owes on its debt.  If Greece were to restructure its debt, it would be the second European country to do so as a result of the global economic crisis, as Iceland continues to resist efforts to pay international depositors in full for their investments in now failed Icelandic banks.  NPR’s Planet Money recently ran a piece on the potential price of Iceland not repaying its debts in full, and Iceland could prove to be an example for Greece.

The country that could suffer the most from a Greek restructuring plan—at least in the short term—would be Germany.  According to The Economist, the German government, banks, private investors, etc. have the biggest exposure to the three European economies that have received bailouts.  As a result, the article suggests that it is in Germany’s best interest to bailout these economies, as while they have contributed €52 billion ($75 billion) to the three bailouts, their total exposure is €230 billion.

The country that actually could be complaining the most about bailing out these economies would in fact be Italy, as it is the only major economy whose contributions to the bailout plans is greater than its exposure.  Since Italy is often the “second ‘I’” in PIIGS, it is in the country’s best interests that its smaller friends do not default.  If one of the “gang of three” were to default, then there would be a risk that the contagion would eventually spread to Italy.

Source: The Economist

The Economist article’s graph also highlights another interesting fact that while the Germany and France contributions to the bailouts are worth about a quarter of their exposure in the gang of three, the “rest of the euro area” (i.e. the nine countries who are not the four largest economies nor the three who have actually received the bailout) have given a much higher ratio of funds to the bailouts than their exposures—fifty percent compared a quarter in the case of Germany and France.  This skewed ratio could help explain why opposition to the bailout has actually translated into eurosceptic votes.  The True Finns historic election results in Finland this weekend are the current case in point.

Finally, the article points out that the U.S. has actually contributed to around €15-20 billion (currently around $21-28 billion) to the three bailouts, apparently through its contributions to the International Monetary Fund (IMF).  While this is still a large sum, it is equivalent to only an estimated ten percent of the country’s exposure to the gang of three.  In fact, based on The Economist’s numbers, the only major economy with a smaller exposure would be the United Kingdom.

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