Europe Doubles Down on Greek Bailout

Hot dry Santa Ana winds blow from the east across the California desert every fall.  They rip and roar their way over and down the mountain passes and rumble their way across the vast Los Angeles basin, pushing the smog trapped against the San Gabriel Mountains out to sea.

For a day or two the sunsets are magnificent from our perch in Long Beach…thick hues of oranges and pinks floating lowly above the Pacific Ocean as the sun dips behind the Palos Verdes Peninsula.  But before long the Santa Ana winds have dried the flora out to tinder kindling.  Sometimes nothing more happens. Other times, with just one spark, Malibu Canyon explodes in flames.

There’s a financial Santa Ana blowing across Europe this summer.  Hot dry winds, originating from Greece, blow west across Italy like volcanic ash from Mount Vesuvius nearly 2000 years ago.  They whip their way west across the Iberian Peninsula drying out the finances of Spain and Portugal to an explosive tinderbox.  But the winds don’t stop there…

They reach gale force as they gust across the Bay of Biscay, encircling France and Germany on the west, while blasting northward past the Celtic Sea where they parch Irelands finances like an Irish coffee…or an Irish car bomb.

Will anything more come of it…will a single spark set off a magnificent conflagration?

No doubt, we shall soon find out.

The PIIGS Are Broke

Something big is coming…a financial crisis of epic proportions.  Like a southern California wildfire, these things happen from time to time.  For Europe, right now happens to be one of these times.

The PIIGS – Portugal, Italy, Ireland, Greece, and Spain – are broke.  What’s more they’ve grown so rotund lazing in the mud and chewing on slop that Germany and France can’t bail them out.  Not all of them, at least.

Maybe they could afford a bailout for Greece, Ireland, and Portugal.  But the tab for Italy and Spain would break the bank for sure.  While the PIIGS are too big to bail…in this era of socialized banking losses, they owe too much to default.

If the PIIGS were to stiff the big European banks – namely German and French banks – European credit flows would dry up and economic activity would too.  Even the possibility of a sovereign default could trigger a massive bank run across Europe at a moment’s notice.

Germany and France can’t guarantee the sovereign debt of the PIIGS.  And even if they could, it would be hopeless.  The PIIGS will never be able to pay back all the paper their governments have issued…particularly when their economies are slipping and sliding backward.

Europe Doubles Down on Greek Bailout

What a mess the central planners have made of things.  Scarcely a decade into their grand currency unification experiment and things are less unified and more discombobulated than ever.  How could such a terrific plan, executed with bureaucratic precision, be such a confused cluster?

Yesterday’s emergency European summit in Brussels, Belgium, where Eurozone leaders got together to grunt and grimace in unison, provided some answers…

By the end of the day, what’s been reported as “a sweeping deal” was reached.  The cornerstone of the deal, if you can believe it, is a good old fashioned riverboat double down…a Greek bailout of 109 billion euro piled on top of the Greek bailout of 110 billion euro just a year ago.

The face saving compromise in the Greek bailout agreement is a technical default for private lenders.  In what amounts to a 21 percent loss for bond holders, Greece will get to refinance their debt at more accommodating terms.  And, at least for now, Angela Merkel and Nicholas Sarkozy can hold their heads up and proclaim ‘crisis averted.’

Fools and idiots double down on their bad bets rather than cutting their losses.  European central planners have piled all their chips on Greece.  But alas, Greece is just the spark that could set off the debt inferno.  When credit markets call Greece’s bluff again, the debt explosion will blast across the continent.


MN Gordon
for Economic Prism

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