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Three reasons Germany won't mutualize debt


(From L to R) These effigies in the likeness of German Vice Chancellor and Economy Minister Philipp Roesler, German Chancellor Angela Merkel and German Social Democrats (SPD) Chairman Sigmar Gabriel were part of a publicity campaign by the Initiative Neue Sociale Markwirtschaft critical of German spending policy. Germany's upper house of parliament is scheduled to vote on Friday whether to ratify the European Stability Mechanism (ESM), the permanent bailout scheme for the euro zone.


Sean Gallup

Economist Nouriel Roubini was just on Bloomberg TV discussing the unfolding euro crisis and the German reaction to all of these proposals to mutualize debt.

Roubini told Bloomberg that the Germans worry about three things:

One is about moral hazard. They say, "if we agree on these things, there's not going to be enough effort by Italy and Spain.

Secondly is a time consistency problem. If you agree on that stuff and they don't delever, then Germany is going to take a huge amount of risk.

And three, there is a huge amount of credit risk the Germans are going to take by backstopping the debt on one side and also the deposits. You need also EZ-wide deposit insurance.

He then said that basically Germans are being asked to marry a non-virgin, and before they're willing to do that they want to see some abstinence...

The Germans say, "you lost your virginity. Now you sign a contract; you say, 'I'm a born again virgin.' Be abstinent for the next two years. Show me your soul and two years from now, we're going to get married. But today, I commit to marriage today? Forget it."

The Germans don't believe and they don't trust the periphery.

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