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News : EU Economy Last Updated: Dec 14, 2010 - 5:35 AM


Schäuble hints at softening of Germany's position on eurobonds; German banks' exposure to Ireland is €25bn
By Michael Hennigan, Founder and Editor of Finfacts
Dec 13, 2010 - 5:50 AM

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Wolfgang Schäuble, German finance minister, has hinted at a softening of Germany's position on eurobonds in return for closer fiscal integration. Meanwhile German banks' exposure to Ireland is 25bn.

Schäuble said in a newspaper interview published yesterday, that the proposal on common bonds could be looked at if there were fundamental changes in the way the Eurozone operates.

The finance minister highlighted the need for a “discussion about how decision-making in Europe can be made more efficient."

“In 10 years we will have a structure that will resemble far more what one describes as political union,” he told Bild am Sonntag newspaper, the Sunday version of Bild, the mass-selling tabloid, which earlier in the year had led a campaign against bailing-out Greece.

Last week Chancellor Merkel rejected a proposal to launch common bonds, saying that they wouldn't provide the appropriate economic incentives.

The proposal for creating a eurobond was put forward last Monday by Jean-Claude Juncker, prime minister of Luxembourg and chairman of the Eurogroup of Eurozone finance ministers and Giulio Tremonti, Italian finance minister, in an article in the Financial Times.

On  Wednesday, Juncker accused Germany of being “un-European” and “a bit simple” in declaring some areas “taboo” in EU negotiations.

Schäuble in his Sunday interview also presented a more positive tone towards smaller countries in the Eurozone, saying if any country was to quit, the euro, “the consequences would be unpredictable. And looking at the effects of the Lehman bankruptcy, I say: let’s not make the same mistake twice,” he told Bild am Sonntag.

“Those who bet their money against the euro will have no success,” Schäuble said. “The euro won’t fail.”

The finance minister also rejected calls for a return to the Deutsche mark. “Anyone who looks at the development of the German economy knows that our international integration is greater than any other economy,” Schäuble said. “Without the euro our own currency would experience a rise in value with negative consequences for exports.”

The Financial Times reports today that European officials are considering measures to overhaul the Eurozone’s €440bn rescue fund, including using it to buy bonds of distressed governments, according to people involved in the deliberations.

The Economist says in its current issue: "A 20% loss on Eurozone and British banks’ combined exposure to Greece, Ireland, Portugal and Spain would mean a hit of about €300bn.

That is a fraction, albeit a hefty one, of the €1.1trn aggregate Tier 1 capital of the 91 European banks that were stress-tested earlier this year. Some think the BIS (Bank for International Settlements)  data overstate the danger. For instance, German regulators reportedly believe their banks’ exposure to Ireland is only €25bn-30bn, against a BIS number of €150bn. This echoes the complaints of Austrian bankers in 2008, who said the BIS figures on their exposure to eastern Europe exaggerated the true risk and panicked the markets unnecessarily."

Leaders of Germany and France met to plot strategy before a key EU summit. Richard Cookson, CIO for Citigroup Private Banking, joined CNBC for more on the European crisis:

A Deutsche Bank report says that banks’ exposure to the current Eurozone hotspots seems to be limited if measured against total bank assets. This does not rule out contagion risk due to relatively large exposures of individual banks or non-bank financial institutions. It says after all, market perceptions of debt sustainability remain an important factor that may affect banking sector stability.

The DBR report says Bundesbank estimates that instead of the reported $139bn, German banks have only  €25bn actual exposure to Irish borrowers overall.

Deutsche Bank Research: Monitoring cross-border exposure: A primer on how to exploit the BIS banking statistics

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