The other day I pointed out this Economist article, which wins this year's "Most Rhetorical Subtitle Ever" contest: "Is Germany bailing out euro-area countries to save its own banks?" Yes. Yes it is. That fact alters the EU political economy quite a bit. But one bit I didn't mention the other, and the article does a good job of highlighting, is just how important this dynamic is:
Calculations by the Bank of England on losses that would arise from haircuts to Greek, Irish, Portuguese and Spanish debt suggests that a 50% haircut would wipe out 70% of the equity in Greek banks, almost half of it in Portuguese and Spanish banks and about 10% of the equity in German and French banks.
In other words, the periphery is most exposed to the periphery. But that's a lot of exposure from German and French banks as well. Enough for those governments to figure out how to lessen their banks' exposure. Right now, the solution appears to be: provide funding until 2013 -- thus giving the banks adequate time to recapitalize -- then pull the plug. Or, as Tyler Cowen puts it:
For instance, taking this approach, the Merkel government in Germany might acknowledge the status quo isn’t working and speedily recapitalize the German banking system, while letting Ireland, Portugal and others off the hook for some of the money. It’s easy to see why this policy isn’t popular in Germany, and indeed, for years German politicians promised to their voters that such an outcome would never happen.
Right, but the question isn't "Will there be a bailout?" It's "Who's going to get it?"