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Peer Steinbrueck says Germany might bail out the Austrians

This video does not mention Austria by name, focusing instead on Ireland, Spain and Greece, but Austria is more of the problem for the Germans as they are leveraged to Eastern Europe.

German Finance Minister Peer Steinbrueck became the first senior policy maker to broach the topic this week, saying some of the 16 euro nations are “getting into difficulties” and may need help. French officials are also concerned about market tensions as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen. The nightmare for Angela Merkel and Nicolas Sarkozy is that widening deficits will prompt investors to shun the debt of some countries, sparking a region-wide crisis. While few investors are yet forecasting any defaults, the mere risk of it may prompt the bloc’s two richest economies to ignore the European Central Bank and announce their willingness to come to the rescue. “When push comes to shove Germany, France, the larger players will bail out those smaller peripheral players,” said Alex Allen, chief investment officer of Eddington Capital Management. “You can’t let one part of the system fail because it leads to failure of the whole system.”

Update at 1315 EST on 18 Feb 2009: The FT Lex column says:

In relative terms, Austria’s exposure is also highest by far, at nearly 70 per cent of GDP. Sweden follows on 30 per cent, through Baltic activities, with Greece on 19 per cent, largely in the Balkans. Austria’s Raiffeisen also has the highest relative exposure among banks, with 54.5 per cent of its risk-weighted assets in eastern Europe, Moody’s estimates. Little wonder Vienna is leading calls for increased European Union support to its eastern neighbours.

Source Germany, France May Face Bailout of Nations, Not Just Banks – Bloomberg.com

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.