http://mrzine.monthlyreview.org/2015/images/german_government_bond_yields.jpgThis note shows that the German public sector balance benefited significantly from the European/Greek debt crisis, because of lower interest payments on public sector debt. This is due to two effects: One, in crisis times investors disproportionately seek out safe investments ("flight to safety"), bidding down the returns on safe-haven assets. We show that German bunds strongly benefited from this effect during the Greek debt crisis. Second, while the European Central Bank (ECB) monetary policy stance was quite close to an "optimal" monetary policy stance for Germany from 1999 to 2007, during the crisis monetary policy was too accommodating from a German perspective, due to the emerging disparities across the Euro area. As a result of these two effects, our calculations suggest that the German sovereign saved more than 100 billion Euros in interest expenses between 2010 and mid-2015. That is, Germany benefited from the Greek crisis even in case that Greece defaults on all its debt (a total of 90 billions) owed to the German government via diverse channels (European Stability Mechanism [ESM], International Monetary Fund [IMF], or directly). In the following, we will document in Section 2 the direct effects news in Greece had on German government bond yields by looking at specific events in the past, providing evidence for an effect of flight-to-quality or flight-to-liquidity. In order to assess the amount of savings to the German budget that may have resulted from this, we develop two different measures for counterfactual yields without such a flight effect in Section 3. These counterfactual yields (traded on secondary markets) are then combined with newly issued debt on primary markets in Section 4, resulting in estimates of the gains for the German sovereign. As argued there, these estimates are most likely very conservative. . . . In the following, we assume that all German government bonds pay interest every year. That is, we use the maturity of bonds in order to distribute interest gains for bonds issued between 2010 and today over the years following the issuance until 2015. Adding gains originating and materializing between 2010 and 2015 over different maturity bands allows us to get a feeling of total savings from bond auctions over this period, as shown in Figure 7. Using this conservative approach, we find savings in the ballpark of 100 billion Euros, irrespective on how we specify the counterfactual. This should be viewed as a lower bound of the benefits accruing to the German government from the debt crisis. These gains are larger than the total Greek debt owed to Germany, (estimated by most accounts at 90 billion Euros, including exposure from a still to be negotiated program). That is, even in event that Greece defaulted on all its debt, the German central government alone would have benefited from the Greek crisis. The gains from other credit financing of the general government (another 25% to 55% of total newly issued debt) are not even accounted for in this context. The gains from different counterfactual scenarios are remarkably similar, ranging from 93 billion for the normal yields scenario to 126 billion from the pre-Euro Taylor-rule scenario. The fact that very different assumptions yield quite similar results provides a high degree of robustness. Concerning the future, we expect Germany to continue profiting from the current situation. If the situation calmed down suddenly, Germany would no longer be able to issue debt at depressed rates. However, sizeable amounts of medium- and long-term bonds issued in the past years are still far away from maturity, extending the period of German profits for some time to come.

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