Sweet! If the Euro collapses, US taxpayers could be on the hook for $1 trillion! Oh, yay!

December 15, 2011

You know what they say, don’t you? A trillion here, a trillion there, and pretty soon you’re taking about real money.

James Pethokoukis posts about the risks for the US taxpayer in the Euro crisis, pointing that, contra Fed Chairman Ben Bernanke (1), the US bailout of Europe is on. I’ll refer you to Pethokoukis’ article for the details, but the gist is this: the International Monetary Fund, to which the United States is far and away the largest contributor, has already loaned Portugal, Greece, and Ireland (three of the five PIIGS countries) roughly $100 billion, of which our share is $20 billion. Petty cash these days, you say? Hah! We’re not done yet…

If the two biggest PIIGS, Italy and Spain, come to the IMF trough, their needs may exceed the IMF’s reserves, so the EU has agreed to loan hundreds of billions to the IMF, which the IMF could then re-loan to Spain and Italy (2) — loans totaling as much as $1.3 trillion. (They don’t call them “PIIGS” for nothing.) Since this is a loan to the IMF, the US taxpayer would be on the hook to European lenders for roughly 17% of that amount in the event Italy and Spain default, or as much as $220 billion.

Makes you wince, doesn’t it? But wait, it gets better!

The Fed is hedging their bets via currency swaps with the European Central Bank. Supposedly, in the event of a default by the borrowers, the ECB could limit US exposure by buying dollars, even if it meant devaluing the Euro through printing as much needed. But that assumes the Euro and the ECB even survive a real crisis. If they don’t, we’re on the hook for it all.

I’ll let James summarize:

U.S. taxpayer exposure is $220 billion via the IMF. That’s scary enough. But then you have the Fed. Lachman notes that the counterparty to the potential $600 billion in swaps is the ECB and that “one must suppose that the European Central Bank would be able to buy whatever quantity of US dollars that it might need to repay the Federal Reserve.” Unless there is a complete euro collapse and then there might not be a ECB to repay anybody. So in addition to a global depression and 20 percent U.S. unemployment, America [‘s exposure] would be nearly $1 trillion.

The insanity of it all becomes clear when one realizes this is like nothing so much as giving an alcoholic another bottle of booze and trusting himself to go on the wagon later. Really. This time he’s serious.

European nations have loaned Greece billions time after time, and yet the Greeks continue their profligate social spending and never reform. And the problem is spreading, as Italian and Spanish finances near collapse. But, instead of recognizing the desperate need to find an orderly end to the Euro so that debtor nations can devalue national currencies as much as needed to grow their way out of debt via exports, they keep trying to save it by buying their way out of debt with more debt. This only delays and makes worse the inevitable end: massive defaults, bankruptcies at major banks, and social chaos.

Now we’re getting into the act in a potentially very big and very harmful (to us) way. And on top of our own horrendous debt.

There is no easy way out of the international debt crisis, but surely the way to start is to stop being stuck on stupid.

Footnotes:
(1) Sure, Ben, we won’t bail them out directly. We’ll just do it through our seat at the IMF. That makes all the difference in the world. And I bet you’ll respect us in the morning, too.
(2) Anyone else reminded of a shell game?

(Crossposted at Sister Toldjah)

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You think the Greek and Irish crises were bad?

November 29, 2010

Wait until Spain’s economy goes into meltdown. That could be the blow that triggers the end of the Euro:

Economists say that given Spain’s large deficits and poor long-term growth prospects, any failure to achieve government targets for cutting the deficit, and/or any rise in Spanish bank risk, could cause a market panic and turn Spain into the next victim of market contagion.

A financial meltdown in Spain would have repercussions far beyond the Iberian Peninsula. For starters, many analysts believe a debt crisis in Spain would trigger a similar meltdown in Italy, which is the fourth-largest economy in the eurozone, and which suffers from many of the same financial woes that are plaguing Spain. What’s more, Italy has one of the world’s highest public debts, expected to reach a staggering 118 percent of GDP in 2010.

Given the relative size of the Spanish economy, financial turmoil in Spain would likely also doom the single European currency, and with that more than 60 years of European dreams of transforming the continent into a superpower-like United States of Europe capable of counter-balancing the United States of America on the global stage.

Germany, which arguably has more invested in (and also has benefited more from) the European Union than any other country in Europe, is alarmed by the potential unraveling of the euro. German Chancellor Angela Merkel says the prospect of serial European bailouts is “exceptionally serious,” and that while she does not want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe.

I know about as much about government finances as I do Buddhist theology, but, Chancellor Merkel’s desire to save the Euro aside, it would not surprise me to see, in a crisis created first by a Spanish and then an Italian crash, Germany withdraw from the Euro in order to protect its own economy. Germans already hated the bailout given to the profligate Greeks, and I imagine there’s grumbling about the deal given the Irish. Just wait until they’re presented with a bill from Madrid and Rome. I could well imagine even the Chancellor throwing up her hands and shouting Wir haben genug!

In any event, do read the whole article. It’s a good overview of both the problems Spain faces and the limited options it has to address those problems, given its entitlement-addicted people, inflexible labor market, and the power ceded to the European Central Bank.

Question: If the Euro zone does collapse like the wet paper bag it is, does that kill the European Union, too? In the abstract, the death of that burgeoning bureaucratic dictatorship would seem to me a desirable thing. But it would be potentially very, very messy. As in “We’re angry, resentful, feeling hyper-nationalistic, and we don’t like you” messy.

 


Death rattle of the Euro?

May 31, 2010

A group of British economists have urged the Greek government to abandon the European Union’s currency and default on its €300/$365 billion debt to save its economy:

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.

Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight.

“So part of the package of leaving the euro must be to convert the debt into the new domestic currency unilaterally.”

Greece’s departure from the euro would prove disastrous for German and French banks, to which it owes billions of euros.

This could make the US banking crash look like a minor fender-bender by comparison. And if Greece flees the Euro and walks away from its debt, could Portugal, Italy, and Spain, three other major debtors, be far behind? And what about the political stability of the EU itself? Germans are already angry and resentful at Greek profligacy; how will they react to having the hundreds of billions in Greek bonds they hold repudiated?

Twenty years ago, we watched the Berlin Wall suddenly come down and the Soviet empire collapse almost overnight. We may be watching something similar with the European Union.

RELATED: Soeren Kern examines what a collapse of the Euro would mean for the United States.