CEIC Data Blog

Germany – Investing into PIIGS Means Cleaning Up

 

Macro Watch: The end of the financial crisis for Germany came in the first months of 2010. The real gross domestic product of the country increased by 2.44% in the first quarter of 2010 and has sustained positive growth rates during the consecutive four quarters. As always, Germany’s discipline, persistence, and modesty have shown results, and the country once again deserves the title of “Europe’s Economic Engine”. The end of the financial crisis, however, did not bring the Germans the expected relief, because the problems that arose in the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries seriously shook the Eurozone. And while a weaker euro initially could be seen as great news for the export-oriented German economy, the foreseen negatives eventually forced the country’s government to seek means for supporting its to-be-defaulted allies. The pragmatic Germans quickly realized that they cannot simply sit back and enjoy the benefits of the PIIGS weakening the euro. It is wrong to believe that their current actions in designing and actively participating in the Euro-Plus Pact are purely altruistic and intended to keep the euro strong, the prices of imports—in particular fuels—low, and direct investments across the European Union stable. The German capital alone invested in the PIIGS countries is a good enough reason for preventing their default.

German Investments in Greece and Italy: Arbitrage Opportunity or Pitfall?
Germany italy Greece
Chart provided by: CEIC Data

Looking simply at the interest rates, one would think that a perfect arbitrage opportunity has opened up and that investing German capital, borrowed at about 3%, into Greek government bonds yielding more than 10% is a risky but still worthwhile operation. When the EU taxpayers are faced with the threat to cover the Greek debts, or in other words to pay a second time, in order to save their investments, however, these percentages do not seem so tempting. At the same time billions of German euros have been invested in Greek financial assets throughout the years. Solely for 2010, the actual value is more than EUR 14 billion. Compared to the hundreds of billions Germany invests in European countries each year, this is not much. The picture drastically changes, however, when another PIIGS country is taken into consideration. Rumbles about Italy’s default have already begun among analysts. And German investments in Italy are considerably greater than those in Greece. Now Germany will have to quickly figure out how to save not only its poor-performing euro partners but also its own capital invested in their economies. So before enjoying the sweet gains from investing into PIIGS, the Germans will first have to clean up the mess these PIIGS ended up in.

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By Ivan Enchev in Bulgaria – CEIC Analyst

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