Germany fails to honor its part of the Greek bailout deal, the popular claim that German taxpayers are bailing out Greece are clearly false and just political verbiage. This is the essence of a post written by economics Professor Bill Mitchell of Australia.
In his blog post, Mitchell deals with the fiscal role of the government-owned German development bank, KfW –Kreditanstalt für Wiederaufbau – and how it interacts with the German Finance Ministry to allow its fiscal balance to move into surplus without the commensurate level of fiscal drag that would normally be associated with that degree of fiscal withdrawal.
Mitchell’s post shows “how the Germans cleverly use their state-owned development bank to advance ideological positions not available to other states that have either privatised these type of institutions or never created them in the first place. It is ironic given the Germans insistence that countries like Greece privatise everything in sight.”
Below is a summary of Prof Mitchell blog post “Germany fails to honour its part of the Greek bailout deal”
“The Greek crisis has allowed the German Ministry of Finance to run surpluses without melting their economy down.
The KfW’s role in that regard is undoubted.
It has been a source of bailout funds for Greece, on behalf of the German government, and has been pocketing handy profits ever since.
This information shows that the popular claims that German taxpayers are bailing out Greece are clearly false and just political verbiage.
Further, despite the understanding that the Member States (bailout partners) would remit any profits made on asset holdings associated with the Greek bailout, the Germans have reneged on that deal, in part, because it has channeled those profits through the KfW, which it claims is at hands length to the government, despite being 100 per cent government-owned.
The KfW borrows in capital markets and all its debt is federal government-guaranteed, which reduces its funding costs relative to a private bank with no such guarantee. It is also exempt from paying company tax.
Taken together, it offers loans to developments at much lower rates than the commercial banks, although it is precluded by law from direct competition with the banks.
The KfW provides the German government with a vehicle to shift stimulus away from the fiscal books and onto the bank’s books.
A demonstration of scandalous hypocrisy. But the German government is good at that.
But here is another angle on the role that the KfW plays in German government relations with the external world.
Remember back to the early bailouts of the Greek government to prevent it going broke and allowing the private French and German banks to retrieve their outstanding loans.
There were some remarkable statements made at the time.
The 2010 decision to use taxpayer funds to bail out private sector bondholders during the European debt crisis was politically tolerable (just) because everyone could embrace the fiction that all of those funds would eventually be paid back at reasonable market interest rates. Few now will defend that fiction.
In a year filled with elections in Europe, politicians may find it more difficult to rationalize why they are digging the hole deeper for their taxpayers by bailing out private sector lenders.
Those poor German taxpayers (among all the Eurozone taxpayers) that have been bailing out profligate Greeks who are too lazy to help themselves with proper Teutonic-style reforms and private banks who went on a risky lending spree to borrowers who should never have been extended credit.
The problem is that this construction is somewhat convenient and avoids some realities.
In other words, any profits that were made from the purchase of Greek government debt would be paid back to Greece to help them reduce their own liabilities.
This was represented as an example of “European Union solidarity”.
The Süddeutsche Zeitung article informs us that Germany receives 1.34 billion euros a year in profits from funds loaned to the Greek government under the various bailouts.
Between 2010 to 2014, the KfW has paid out around 360 million euro in revenues to the German government and in the coming years the federal government is expecting around 20 million euro per year on interest revenues.” (full blog post by Professor Bill Mitchell in his blog here).
PS If I am not wrong, the profits from the purchase of Greek government debt were never paid back to Greece. Varoufakis tried to retrieve them in 2015. I think, the 3. bailout made a reference on this issue, but I’m not sure the money some 19 millions?billion? euros is still outside Greece.