SYDNEY (MarketWatch) — The standard narrative states that Germany does not want to bail out troubled peripheral nations within the euro zone. The reality is that the more highly rated and larger euro zone members, Germany and France, may not have the necessary financial resources for the task.
German Gross Domestic Product is euro 2.5 trillion and its debt levels are around 80% of GDP. French GDP is euro 2.1 trillion and its debt levels are around 90% of GDP. Germany and France’s greatest vulnerability is the large financial exposures arising from the current European debt crisis. Their exposures to the troubled peripheral economies are large.
German and French banks have exposures of around euro 800 billion to the debt issues of peripheral nations.
The German and French states have indirect exposure through support of various official institutions such as the European Union, European Central Bank, the International Monetary Fund and special bailout funds. As of April, the exposure of the ECB to Greece, Portugal, Ireland, Spain and Italy was euro 918 billion and rising rapidly, driven by capital flight from these countries.