Merkel…from bad to worse for German leader

…and why France faces a downgrade sooner rather than later.

The Slog’s banking source quoted in the September 12th posting here seems to have been very much on the money about the wobbliness and significance of German Landesbank subsidiaries in the context of Greek debt. Data compiled by Bloomberg  confirm that Germany’s bad banks, backed directly by the state to prevent the collapse of Hypo Real Estate Holding AG and WestLB AG during the credit crisis, would be the hardest hit in the event of a Greek default, leaving taxpayers to shoulder the bill a second time. Hypo’s FMS Wertmanagement, with 8.76 billion euros ($12 billion) in Greek sovereign investments and loans, and WestLB’s Erste Abwicklungsanstalt, with 1.21 billion euros, bear more than half of German banks’ Greek debt.

With surveyed investors yesterday seeing  a 94% chance Greece will default, the situation could be dire for the Berlin coalition, as it would  involve a direct, non-Troika payout from the Government: money for which there is no existing budget at all. But in some ways this shows good German planning, in that the ‘Bad Banks’ created solely to deal with Landesbank subsidiary debt provide a form of firewall against infection of the country’s private banking system. Using this method, for instance, the Germans between March and June reduced their Greek debt exposure from $24bn to $18bn.

The French didn’t follow suit, and this was very silly of them: French lenders top the list of Greek creditors with $57 billion in exposure, according to Basel-based monitor BIS. And some of President Sarkozy’s senior Sorbonnier advisers are of the opinion that, in the absence of other monies being forthcoming, here too the Elysee Palace will have to cough up directly. Given the French already have the EU’s fastest-rising sovereign deficit, a further $57bn hole is going to put their credit rating in severe danger of a downgrade.

Related: Are diplomatic dirty tricks behind the Siemens story?