Semantic quibbling over whether bailouts of southern European governments that were in debt because they bailed out southern European banks that were in debt because they owed money to Germany banks “really” constitutes a bailout of Germany rather than Greece and Portugal isn’t very productive, this Bloomberg editorial helpfully drives home the point that you can’t have a debt without a lender:
Let’s begin with the observation that irresponsible borrowers can’t exist without irresponsible lenders. Germany’s banks were Greece’s enablers. Thanks partly to lax regulation, German banks built up precarious exposures to Europe’s peripheral countries in the years before the crisis. By December 2009, according to the Bank for International Settlements, German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks’ aggregate capital. In other words, they lent more than they could afford.
Something that’s important to grasp here is that some of the Greek, Portugese, and Italian lending and most of the Spanish and Irish lending was to do the private sector. So if you want to assign blame to a government, then German prudential regulators are at least as much to blame as southern European budget writers and in the non-Greece cases pretty clearly more so. On the one hand, Germans are being asked to pay the price to float borrowing by citizens of less efficient economies. But on the other hand, Germans are largely in that position because of their own poorly regulated banks. That’s cold comfort to the German on the street, who’s obviously not a bank regulator, but part of the current game in German politics is to hide this particular ball so that nobody reforms anything about the domestic banking sector.