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Sunday, December 1, 2013

The Gigantic Dimensions of Germany's Foreign Assets Position!

The table below shows the net foreign asset position of Germany as it is composed of foreign assets, reduced by foreign liablitities. All amounts are in BEUR.

Net Assets

2011 2012 
2011 2012 
2011 2012 

A. Financial Sector 2.863 2.746
2.679 2.632
184 114

B. Private Sector 2.788 3.074
1.728 1.841
1.060 1.233

C. State Sector 238 295
1.271 1.349
-1.033 -1.055

D. Bundesbank 715 921
47 107
668 815

Grand Total 6.604 7.036
5.725 5.929
879 1.107

Annual GDP ca. 2.660!

There are various ways to look at a foreign assets/liabilities position, depending on what point one wants to make. If one wants to make the point that Germany is exporting its savings, one has to look at the net position. Every country will always export some of its savings but it also imports the savings of other countries. When savings imports exceed exports, the country is a net borrower. When exports exceed imports, the country is a net lender. Germany clearly is a net lender to the rest of the world with 1.107 BEUR net foreign assets at Y/E 2012.

Net exports of savings and a net foreign assets position are a function of current account balances. Current account surpluses translate 1:1 into increases in net foreign assets. It should be noted that Germany's net foreign assets (net capital exports) are approaching 50% of its GDP!

If one wants to make the point that a country carries substantial financial risks outside its borders, one has to look at the gross foreign assets position. Why? Because, generally, there is no right of offset between assets and liabilitites (except, perhaps, in selective transactions like swap agreements between Central Banks). If the rest of the world went bankrupt, the German economy would be out of 7.036 BEUR (as per Y/E 2012) while the liquidator of the rest of the world would still have claims of 5.929 BEUR against the German economy.

Having said all that, the sum of German economic agents (banks, insurance companies, corporations, private individuals, the state, the Bundesbank, etc.) had 7.036 BEUR at risk outside German borders as of Y/E 2012. Is that a lot? Well, it is close to 3-times the GDP of the German economy. That's a lot!

What's wrong with foreign assets if they are wisely and safely invested? Well, they are subject to foreign jurisdictions, in the first place. Secondly, they can't all be wisely and safely invested. Money flows, directly or indirectly, from those who have it to those who need it, and those who need it are a greater risk than those who have it.

This article from the WSJ calculates that, from 2007-11, the German economy lost 575 BEUR of its foreign assets (just think of the losses which German banks and insurance companies have taken in sub-prime, Lehman, Iceland, Ireland, Greece, etc.). If that figure is only half-way correct, it would suggest that the German economy has lost 10% (or more) of its foreign assets during the period.

When savers lose 10% of their depositis, there is an uproar. Why was there no uproar (yet) despite the significant loss of foreign assets? Because those losses have not been felt directly by the German tax payers. They were recorded at upper layers of the economy (banks, insurance companies, etc.). 

When do losses of foreign assets hit the tax payers? In the short term, mostly when they flow through the budget. Those losses flow through the budget when the state itself loses foreign assets (i. e. when the state writes off a, say, rescue loan to Greece) or when the state has to spend inordinate amounts of money to bail-out a bank like HypoRealEstate because that bank lost tons of foreign assets.

As I said in the beginning, gross foreign assets are heavily driven by current account surpluses and net foreign assets are driven entirely by current account surpluses. Once Germans begin worrying about their country's foreign assets position, they may perhaps be persuaded that an economic model which continually increases that position (i. e. excessive and chronic current account surpluses) is perhaps not in the best interest of Germany.

If reason does not work, just scare Germans that their pensions and future living standards are not safe. That will work any time!

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