Mike O’Rourke of BTIG spotlights some interesting comments from a recently released IMF report (.pdf) on Germany:”Simulation exercises suggest that German banks could suffer significant losses from commercial real estate investments in the U.S. and Spain, and more generally from exposures to Southern Europe. The simulations also suggest that a reassessment of risks associated with claims on Southern Europe could have a large impact on capital flows within Europe, as German (and also French) banks would significantly reduce their foreign claims to restore capital ratios.”
That was part of a broader argument against rosy German growth prospects.
And as for France, he’s O’Rourke:
The IMF breaks down the “Geographical distribution of Foreign Claims on International Banks,” for Germany, France, the United Kingdom and the United States. By a wide margin, the United States has the least exposure in Southern Europe, with only $118.5 Billion of its $2.58 Trillion in foreign claims. The U.K. has the second lowest exposure at $236 Billion of its $3.69 Trillion in foreign claims. German bank exposure is $523 Billion of $3.46 Trillion and French exposure is $781 Billion of $3.57 Trillion. Based upon those stats, it looks like the downgrade of French growth should be in process.
Now back to the IMF, which draws the following conclusions about Germany:
The recovery underway is likely to be moderate, with predominantly downside
risks. Muted euro area expansion and the restraint of U.S. consumers will limit Germany’s
export growth, while domestically consumers will remain cautious given the expected
increase in unemployment and moderate income gains, and remaining banking problems will
contain credit supply. GDP growth could also be lower because of setbacks to world trade or
the domestic financial system.
The policy challenge is managing ongoing risks while preparing to unwind the
extraordinary measures introduced during the crisis. Fiscal policy will have to transition
from supporting the recovery to credible consolidation, financial sector policies from balance
sheets repair to improvements of the stability framework, and labour market and structural
policies from employment smoothing to fostering domestic growth.
Fiscal consolidation needs to start as soon as the recovery has firmed up. The
2010 budget appropriately provides stimulus for a still fragile recovery. As a consequence,
the general government deficit is estimated to rise in 2010 to nearly twice the limit set by the
SGP. Moreover, the federal structural balance is significantly below the target set by the new
constitutional rule for 2016. With public debt rising and private sector growth expected to be
self-sustaining by 2011, consolidation should become a priority.
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