Der Spiegel sheds light on why European politicians really have no choice but to bailout the PIIGS.
European financial companies that almost collapsed during the U.S. financial crisis are now once again heavily exposed to the European potential sovereign debt one.
Thus it’s not just about saving the euro currency system, it’s about saving the entire European financial system:
German Finance Minister Wolfgang Schäuble, a member of the centre-right Christian Democratic Union (CDU), and his senior staff aren’t just worried about the euro. They are also concerned that the German banking sector could be thrown out of balance once again if Greece defaults on its debt.
The senior Finance Ministry officials were alarmed by a letter from Jochen Sanio, the president of Germany’s Federal Financial Supervisory Authority, known as BaFin. In the letter, which was addressed to Jörg Asmussen, a senior Finance Ministry official, Sanio urgently warned that the consequences of a Greek default could resemble the effects of the Lehman bankruptcy.
German banks could probably cope with a Greek default, but if it led to the financial collapse of other countries, like Italy, Spain or Portugal, the consequences for the banking sector could be catastrophic, Sanio warns. If this happened, the financial market crisis would only get worse.
In his letter, the BaFin president calculates what could happen to individual banks if securities from these countries lost 30, 50 or even 70 per cent of their value. The results are horrifying.
According to Sanio’s scenario, banks that were already hard hit by the effects of the Lehman bankruptcy would be the most vulnerable, particularly German mortgage lender Hypo Real Estate (HRE), which has since been nationalized. According to BaFin, HRE, which had to be propped up in late 2008 with government loan guarantees worth about €100 billion, holds by far the largest amount of Greek debt out of all German banks, with a total volume of €9.1 billion.