Satyajit Das: Why Germany can't bail out Europe

Germany is indirectly exposed through its support of various official institutions like the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF) and special bail-out funds. As of April 2012, the exposure of ECB alone to Greece, Portugal, Ireland, Spain and Italy is euro 918 billion and rising rapidly, driven by capital flight out of these countries.

German guarantees supporting the European Financial Stability Fund (EFSF) are over euro 200 billion.

Germany’s largest single direct exposures is through the Bundesbank’s euro 644 billion exposure under the Trans-European Automated Real-time Gross Settlement Express Transfer System, or TARGET2, to other central banks in the euro zone. Designed as a payment system to settle cross-border funds flows, surplus countries, like Germany, have been forced to use TARGET2 to finance peripheral countries without access to money markets to fund trade deficits and the capital flight out of their countries. Germany is by far the largest creditor in TARGET2. The Netherlands, Finland and Luxembourg are the other creditors with all other euro-zone countries being net debtors within the system.