Ifo Institute – Leibniz Institute for Economic Research at the University of Munich The Exposure Level
Eurozone countries’ exposure, highlighting Germany’s share, derived from bailouts and other financial support measures for distressed countries
The Eurozone is currently going through a grave balance-of-payments crisis. Various bail-out measures have been introduced to save individual euro countries from insolvency, which are collectively referred to as the “euro bailout package”. In addition to this funding, however, Target credit is being granted via the ECB system, on top of credit being given in the form of sovereign bond purchases via central banks. Target credit is granted when the central banks of individual countries make payments to banks of other countries. Such payments are made possible because the respective national central banks of the borrowing countries grant more refinancing credit and create more central bank money than necessary in their own jurisdiction. The additionally created central bank money gives domestic economic agents the opportunity to finance balance-of-payments deficits, or in net terms to purchase goods and assets from, or pay off debts in, other Eurozone countries. There is no term for Target credit in principle, and the interest that national central banks charge each other equals the interest rate of main refinancing operations.
The total exposure of the Eurozone countries resulting from the bail-outs and other measures is compiled in the overview offered below. Germany’s share in the overall exposure is defined as its exposure level.
The bail-out measures are presented in four different columns in the figure. The respective figures are rounded up/down to the nearest billion. The first (lefthand) column shows the amounts that have already been paid out, the second column shows all of the bailout funds pledged to date, and the third column shows the total potential lending volume that exists since the ESM Treaty became legally valid. This represents the guarantees and/or credit volumes provided via the bail-out initiatives and packages of the Eurozone countries, including contributions from the International Monetary Fund (IMF), as well as the sums that the ECB has spent on purchasing sovereign bonds and the Target credits granted to the central banks of Greece, Ireland, Portugal, Spain (referred to collectively as the GIPS countries), Italy and Cyprus. Lastly, the claims and/or liabilities against the Eurosystem are taken into consideration arising from individual countries issuing de facto more or fewer bank notes than the amount corresponding to their share in the ECB's capital. The column on the right shows Germany’s share in the exposure in the extreme case of one the crisis-stricken countries declaring insolvency and exiting the Eurozone should the credit line shown in the third column be exhausted, the crisis-afflicted countries be unable to repay any of their debts and the should the euro as survive. In this case scenario the legal relationship between the ECB system and the commercial banks in the crisis-stricken countries is terminated. The losses sustained by the central banks of the other euro countries are then independent of the issue of whether these commercial banks repay their refinancing credits and are limited to the central banks’ respective shares of the Target credit owed by the crisis-stricken countries and the share of their sovereign bond purchases. In addition, proportionate losses also arise from inter-government loans, IMF and EU loans.
ECB contribution and first bail-out package for Greece
Support for the crisis-stricken countries began around autumn 2007, long before the first bail-out package was agreed, when the central banks of the troubled countries replaced interbank loans with Target credit. The red oblongs denote the Target liabilities of the GIPS countries, as well as those of Italy and Cyprus. For Greece, Ireland, Portugal and Cyprus the data comes from International Monetary Fund (IMF). For more details of the exact calculation see Sinn and Wollmershäuser. The Target figures for Italy and Spain can be taken directly from the statistics of their respective national central banks (NCBs). The Target balances of the Eurozone countries are published on a monthly basis, but with different delays. The most recently published amounts are used to calculate the combined Target liabilities of the crisis-stricken countries.
In May 2010 the ECB and the NCBs in the Eurosystem began buying sovereign bonds in the euro area. These data are published on an ongoing basis in the ECB's consolidated weekly financial statement. The Eurosystem's consolidated financial statement contains the Securities Market Program in the section “Items related to monetary policy operations” under asset items 7.1 (Securities for monetary policy purposes). With these sovereign bond purchases the ECB is taking over the role of granting credit in the Eurozone’s crisis-affected countries that would previously have been granted by the market players. Since all of the NCBs of the euro countries participate in the purchase of sovereign bonds according to their share in the ECB’s capital, the share of the crisis countries – 37% - is subtracted from the overall total. The corresponding volumes are represented by the dark blue oblongs in the figure. The purchases made by the NCBs of the crisis countries are not included, since they on their own lead to growth in the local money supply that is similar to refinancing credit and is thus already accounted for as Target credit.
The part of the column (in pink) that goes below the zero line shows that the crisis countries have combined have claims versus the remaining euro countries because they issued a slightly smaller share of bank notes than they were entitled to. The figure shows that this amount is very small.
Prior to the decisions taken regarding official bail-out packages, the first bail-out package for Greece was agreed in May 2010 to prevent the country from suffering acute insolvency. The package constituted a joint effort on the part of the Eurozone countries and the IMF. Greece was pledged €80 billion from the Eurozone countries and €30 billion from the IMF. Funds were to be paid out in individual tranches according to the Greek state’s financing requirements. Slovakia objected to these payments from the outset. After the second tranche Ireland ceased its payment, with Portugal following suit after the fourth tranche (by which time Portugal itself was accepting financial assistance). This meant that the first bail-out package financed by the euro countries effectively only totalled €77.3 billion. By the end of 2011 funds totalling €52.9 billion had been paid out to Greece by the euro countries in the framework of this bail-out package. In the context of negotiations over a second bail-out package for Greece (see below), it was established that the remaining funds (€24.4 billion euros) were no longer to be paid out in the form of bilateral credits, but allocated by the EFSF instead. The second aid donor, namely the IMF, paid out bail-out funds totalling around €20 billion to Greece by the end of 2011.
Financial support mechanisms: the EFSM, EFSF and ESM
In May 2010 the euro countries decided to set up an interim bail-out fund, resulting in the creation of the European Financial Stability Mechanism (EFSM; effective as of May 2010) and the European Financial Stability Facility (EFSF; effective as of June 2010), to make money available to countries in financial difficulties. This bail-out fund is supported by additional financial contributions from the IMF. The EFSM is a EU instrument that is financed via the EU budget. The original EFSF’s guarantee capacity of 440 billion euros was increased to 780 billion euros in October 2011 (the so-called boosting of the EFSF), in order to actually make the indicative lending envelope of 440 billion euros actually available. The funding made available by the IMF to the EFSF and EFSM in parallel to European support totals (at least) 250 billion euros.
In March 2011 the Council of the European Union agreed to set up a permanent European Stability Mechanism (ESM) that would take over the tasks of the EFSF and EFSM as of July 2013 and should have an effective lending capacity of 500 billion euros. After the crisis deepened, the finance ministers of the euro countries decided on 23 January 2012 to make the ESM effective as of July 2012 and to let it function parallel to the EFSF until mid-2013. The corresponding treaty was signed by country representatives in Brussels on 2 February 2012. The treaty was to come into effect on the date that instruments of ratification were deposited by so many countries that at least 90% of the subscription amount was achieved. Due to the fact that the ratification process lasted longer than expected, the treaty did not take effect until 27 September 2012 and the ESM did not become operational until 8 October 2012. On 30 March 2012 the finance ministers of the Eurozone countries agreed to erecting a “firewall” totalling €800 billion, of which €500 billion represents the ESM credit facility, €200 billion are EFSF bail-out funds earmarked for Greece, Ireland and Portugal (actual volume of EFSF funds for these three countries: €188), €49 billion in EFSM funds for the programmes in Ireland and Portugal, and finally €53 billion from the first bail-out package for Greece in bilateral credits that have already been paid out. The upper limit of the ESM (€500 billion) was also confirmed, but it was also decided that this maximum amount will not be reduced by the EFSF funds already agreed upon for programmes in Ireland, Portugal and Greece. A condition for access to the ESM is that the granting of relief funds is coupled with the ratification of the Fiscal Treaty by 1 March 2013. In order to secure the lending volume of €500 billion, it is necessary to supply the ESM with a capital of €700 billion. This total can be broken down into €80 billion to be paid in and €620 billion in callable capital.
Four Eurozone countries have financial assistance payments (see the second column in the figure), starting with Ireland in November 2010. The total package agreed upon was worth €85 billion. Ireland itself funded €17.5 billion of this amount by tapping cash reserves and from a pension fund, while non-euro countries, namely the UK (€3.8 billion), Sweden (€0.6 billion) and Denmark (€0.4 billion) granted bilateral credits. The remaining contribution of the EFSM, EFSF and IMF totalled €62.7 billion (green oblong), of which € 22.5 billion was granted by the ESM and IMF respectively, and the remaining €17.7 billion euros was taken from the EFSF. In April 2011 Portugal was next in line. A package worth €78 billion (yellow oblong) was put together for this country, to which the EFSM, EFSF and IMF each contributed €26 billion euros. The list ends with the second bail-out package for Greece, which was finalised in July 2011. At the EU Summit of October 2011 this package had been adjusted in line with current events at the time  and the agreed total of €130 billion by 2014 was finally confirmed in February 2012. On 14 March 2012 the euro countries finally agreed upon the second bail-out package, worth a total of up to €144.6 billion (including the €24.4 billion from the first package that had not yet been spent) available until the end of 2014 from EFSF funds. Finally, the IMF announced on 15 March 2012 that it would make €28 billion euros available to Greece (including around €10 billion that remained unspent from the first bail-out package) by the first quarter of 2016. A total of over €138 billion euros in new funds were therefore pledged: €120.3 billion by the euro countries via the EFSF and around €18 billion by the IMF. The differential between this sum and the €130 billion cited above is due to that fact that €8.25 billion in IMF funds will not be paid out until 2015/2016. Together with the first bail-out package, financial assistance for Greece totals around €246 billion (light blue in the figure), of which the euro countries contributed €197.5 billion and the IMF around €48 billion. The bail-out funds for the three countries are represented by the oblongs coloured light blue (for Greece), green (for Ireland) and yellow (for Portugal); the first column denotes sums already paid out, while the second (and third) columns show the amounts pledged.
At the beginning of June 2012 the Spanish government informed its euro partners that it wished to request assistance from the euro countries for the restructuring of its banking sector. Funds totalling up to €100 billion from the EFSF/ESM were being considered. On 25 June 2012 a formal request was submitted by Spain. The programme took effect on 23 July 2012. Provisional calculations indicate a capital requirement of between 51 billion euros and 62 billion euros, and including a safety buffer the total requirement remains 100 billion euros. The programme was finally transferred to the ESM in November 2012. The first tranche was paid out in December. This bailout package is represented by the light green oblong in the three left-hand columns. On the 25 June 2012 the government of Cyprus also announced that the country would request bail-out funds. The country is suffering from a banking crisis and from its very close economic ties with Greece, which has had a major impact on its banks. On 25 March 2013 the donors and Cyprus basically agreed to a bail-out package worth 10 billion euros. The ESM should contribute around €9 billion and the IMF should pay in up to €1 billion. The first tranche of ESM bail-out funds was paid out on 13 May 2013. This bail-out programme is represented by the small white area in the three left-hand columns.
The middle column of the figure shows the potential credit volumes of all bail-out measures combined. As mentioned the same amount is cited for ECB financial assistance as in the left-hand column. The bail-out packages agreed for Greece, Ireland, Portugal and Spain are shown in the second column. The violet oblong quantifies the remaining IMF funds from the €250 billion made available. After deducing the funds already pledged totaling €67 billion (€22.5 billion for Ireland, €26 billion for Portugal and €18 billion for Greece, €1 billion for Cyprus), the remaining funds currently total €182 billion. The grey oblong at the top of the columns represents the permanent ESM bail-out fund, which still has a capacity to grant €391 billion of credit after deduction of the sum awarded to Spain and Cyprus.
A breakdown of German exposure
The right-hand column of the figure shows Germany’s exposure, which is derived from the potential bail-out funds represented in the third column. The key underlying calculation of the German share in the exposure is different for the various segments. For the Target liabilities of the crisis-stricken countries Germany’s share of exposure is calculated from the ECB’s capital key as of 1 January 2011, whereby Germany has a share of around 27% of the liabilities of all 17 euro countries. However, should the crisis-stricken countries become insolvent and exit the Eurozone, as assumed here, while the euro continues to exist, only the remaining eleven euro countries would be exposed to the Target liabilities. In this scenario Germany would be liable for around 43% of the total exposure. Its current liability is represented by the red oblong on the right-hand column.
The dark blue segment of the right-hand column shows sovereign bond purchases by the central banks, as described above. Since the central banks of all euro countries, including those of the crisis-stricken countries themselves, are involved in these purchases, Germany’s share of exposure is calculated based on the general ECB capital key and consequently totals around 27 percent of the total sum and around 43% of the sum represented in the other column excluding the crisis countries.
The pale blue oblong represents the first two bail-out packages for Greece. Germany has contributed bilateral credit totalling around €15.2 billion. Germany will be liable for around 43% of EFSF funds for the second programme should Greece, Ireland, Portugal, Spain, Italy and Cyprus drop out. This again represents Germany’s share according to the capital key of the euro countries excluding the crisis countries. Germany’s share in both of the IMF bail-out packages granted at the same time is in line with its contribution to the IMF’s capital and therefore totals 6%.
The EFSF and IMF contributed the same share of bail-out funds for Ireland (green) and Portugal (yellow) as they did to Greece. Germany contributed almost 20% to the funds already made available by the FSM since this corresponds to Germany’s current of the revenues in the EU budget. Since the ESM does not provide for any specific liability on the part of member countries for concrete financial assistance, the German share of exposure in the programme to recapitalize Spanish banks and to bail-out Cyprus are not listed separately, but are included in Germany’s overall exposure to the ESM (see below).
Germany’s contribution to the IMF funds that have not yet been pledged (violet) once again amounts to 6%. The ESM permanent bail-out fund will have a capital of €700 billion. Germany’s exposure (grey area) is calculated from its share of just over 27%. The capital to be paid in (€21.7 billion) and the available capital (€168.3 billion) are represented separately.
The broad pink line under the zero line stands for Germany’s claims vis-à-vis the crisis-stricken countries arising from their combined under-proportional issuance of bank notes. Germany’s liability amounts a share of around 43 percent (calculation basis same as for Target balances).
Text written on 10.07.2012, last revised on 14.05.2013.
 See Sinn, Hans-Werner and Timo Wollmershäuser, “Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility”, International Tax and Public Finance 2012 (Abstract), first published as CESifo Working Paper No. 3500, 24 June 2011 (Download) and as NBER Working Paper 17626, November 2011 (Download) as well as Sinn, Hans-Werner, “Die Target-Kredite der deutschen Bundesbank”, ifo Schnelldienst 65, special issue, 21 March 2012 (Download).
 See Sinn, Hans-Werner and Timo Wollmershäuser, “Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility”, at the place indicated in the annex.
 See press release dated 10 May 2010 and the Eurosystem's consolidated financial statement dated 14 May 2010, both ECB.
 See Federal Ministry of Finance, monthly report for October 2011, p. 36-38.
 See European Commission, The Second Economic Adjustment Programme for Greece, March 2012, p. 4.
 See European Commission, reference specified above, p. 94 and International Monetary Fund, IMF Country Report No. 12/57, p. 84.
 See European Commission, The Financial Sector Adjustment Programme for Spain, October 2012, p. 30.