German banks were exposed indirectly through Austrian lending to Eastern Europe

Evidence

Europe’s largest economy, Germany, saw the first signs of trouble approaching in August 2007 when IKB, a Dusseldorf-based lender, had to be rescued after suffering losses on its US subprime investments. Following this incident, it seemed for a while that German banks had avoided the crisis, until the state had to step in and rescue the Hypo Real Estate bank in 2008 when its loans to Eastern European mortgagers dried up. This sounded the alarm that other, bigger German banks were still exposed to the East through their loans to Austrian banks, which in turn lent that cash, equivalent to over 70 percent of Austrian GDP, to Eastern European mortgagers whose currencies were now rapidly losing value. — Mark Blyth, Austerity, 154

Categorization

• XREF: The Austrian-bank channel of German exposure is a key mechanism for understanding the crisis’s propagation, relevant to Mattei’s and other readings on how cross-border bank lending transmitted US shocks to Europe. — connects to: Eastern European austerity in 2009 existed to protect Western banks — Mark Blyth, Austerity: The History of a Dangerous…, 601; Core European banks financed periphery consumption, creating Eurozone imbalances that later turned toxic — Mark Blyth, Austerity: The History of a Dangerous…, 245; Twenty large European banks had cross-border exposures exceeding their entire core capital — Mark Blyth, Austerity: The History of a Dangerous…, 796 (+4 more)

Broader Connections

• Core European banks financed periphery consumption, creating Eurozone imbalances that later turned toxic #expands (0.82) — Mark Blyth, Austerity, 245
• Twenty large European banks had cross-border exposures exceeding their entire core capital #expands (0.75) — Mark Blyth, Austerity, 796
• The euro created bank incentives that produced a private crisis #expands (0.72) — Mark Blyth, Austerity, 153
• European banking crisis was mostly private-sector exposure, not sovereign over-spending #corroborates (0.72) — Mark Blyth, Austerity, 240
• The European debt crisis resulted from banking losses, not sovereign overspending #corroborates (0.72) — Mark Blyth, Austerity, 40