Greece reports that it has secured a second major bailout of $172 billion in an attempt to save it from bankruptcy. This is in addition to an original bailout of $146 billion Greece received in May 2010. In addition, it is estimated that Greece may need another $66 billion between 2015 and 2020 to achieve a debt to GDP ratio of 120% by 2020, still excessive by any measure of financial well being.
This totals $384 billion in planned bailouts to Greece, a relatively small economy compared to others in trouble in Europe. Greece's entire GDP is only $312 billion which puts the magnitude of this total aid package in perspective. And there is no guarantee that more monies won't be called for because nobody can predict how Greece's economy might contract given all the austerity measures it has to implement as a condition of these bailouts.
But Greece is not Europe's only problem. Every major country in Europe is highly leveraged with the exceptions of Sweden and Norway. And, Portugal, and much larger Spain and Italy have exceptionally large debt levels and very weak economies.
The Europeans are ready to announce that they are planning to fund a new European Stability Mechanism with approximately $660 billion to avert any other crises like Greece. In effect, they are taking a page from Hank Paulson's book who claimed that if you had a big enough bazooka, you probably would never have to use it. But, the European bazooka looks more like a pop-gun when you look at the magnitude of the potential problems there.
Here are the outstanding public debt amounts for Greece, Portugal, Spain and Italy and what percent of GDP they represent:
It is unlikely that the bailouts of these countries will cost as much as Greece as a percent of their outstanding debt, but if bailouts equal to just 50% of these countries' debts were required, here is the magnitude of aid we are talking about.
Possible Required Bailout Amount (50% of Current Debt):
That's right, $2 trillion just to bail out these three troubled economies. This is much larger than the newly constructed European bazooka of $660 billion and is large enough to bankrupt nearly every major bank in Europe if they had to face these amounts of write-downs on their European country and bank debt investments. And this says nothing about the support that might be needed by the eastern bloc countries or by countries that are heavily into banking like Switzerland, Ireland, Austria, Denmark, Belgium, the Netherlands and the UK. I don't mention France and Germany only because if the contagion reaches them the game is surely over.
The idea that governments can save countries and large major global banks from defaulting is a farce. It is nothing more than saving bank and country creditors by having taxpayers pick up the cost of their investing mistakes. The world has too much debt in it, on its governments, in its banks and on its people. If we don't begin a worldwide program of debt restructuring we guarantee that these debts will continue to strangle any global economic recovery.
Banks need to be restructured with much less debt and more equity capital so bank executives and bank shareholders have some skin in the game and are motivated to take less risk. Forget giving managements options for free; make them invest some of their cash in their company's stock so they begin to act like true shareholders and not just free riders. Countries need to be restructured to reduce their debt balances, but not until they agree to hard and fast borrowing limits. And homeowners, underwater on their mortgages, have to be given real alternatives to either reduce their debts or to rent their homes rather than own them or to allow them to default without enormous penalties and loss of their credit ratings.
Yes, if we reduce the amount of debt in the world, those holding that debt will appear poorer. Wealthy individual investors, pension funds, banks and insurance companies will all take a hit. But, I would argue, they have already lost that money. It isn't going to be repaid. They just refuse to admit it by not marking their investments down to true value. In so doing, they continue this ruse of keeping too much debt on the world that ends up having a very real impact on our future growth and prosperity.
John R. Talbott, previously a Goldman Sachs investment banker, is a best selling author and economic consultant to families whose books predicted the economic crisis. You can read more about his books, the accuracy of his predictions and his financial consulting activities at www.stopthelying.com
Jared Bernstein: Threats to the Current Recovery
But the greatest problem of all is convincing economists that the wealth of the world (including cheap food) is not derived from the circulation of money, it is derived from the input of primary energy, namely cheap oil coal and gas.
And there are no alternatives.
We’ve spent the last 250 years pumping hydrocarbon fuel into our economic system, congratulating ourselves on our business acumen and technical wizardry as we drew out the financial benefits of it. Not many have dared to point out that to keep such a system going, (ie to pay wages through industrial employment), you have to keep feeding in cheap primary energy. Without it, the system collapses.
Does that sound familiar?
It should, because that’s how Ponzi schemes work, and that’s what we’ve all bought into. Global ‘wealth’ is a delusion, and as energy supplies get tighter (oil price has quadrupled in 10 years) the energy input problem of Europe (and USA) is rocking the pyramid. We built that economy pyramid on cheap energy, now we only have expensive energy so jobs are vanishing and the financial system is collapsing. We are facing a very unpleasant future, and we will not be able to buy our way out of it. http://www.yourmedievalfuture.com/
A lower debt to GDP ratio;
A positive (as opposed to negative) current account balance;
A positive (as opposed to negative) trade balance; and
A more nearly balanced budget.
Why does the US business and financial community continue to wave red flags about the rest of the world? Because they profit from it.
a lower debt to GDP ratio
a current accounts surplus (as compared to a deficit)
a net positive foreign trade balance (as opposed to a deficit)
The US financial community is increasingly desperate to maintain the illusion that other countries have problems that make ours pale by comparison, because it serves their short term interests.
This is not to say that there are no problems in the Euro zone. Curiously, of the leaders there, only one - Wolfgang Schäuble, the German finance minister - has spoken of one of the key reasons for Greece's problem: the broken tax system. The rich in Greece largely evade taxes, and the tax system is incapable of enforcing the law. This is juxtaposed to the US, where the rich have simply fixed the system so they can legally avoid paying their taxes. We in the US focus on legality instead of justice.
This is what we call a positive feedback loop, and as any electrical engineer or physicist who is worth their salt can tell you, positive feedback loops are unstable.
The way to fix this is to decouple the ratings agencies from the investment firms, and outlaw credit default swaps. Fat chance that will happen.
Hopefully the US will learn from the debt crisis of these countries and not follow them. I hope its not too late for us.
Quick review: Why is there a European Union, again?
oops
Compound Interest takes 2nd place.
Never write off a loss, you might get fired !
When a couple of months back it came to light that TBTF Banks were in a process of migrating their massive derivatives holdings from their investment banks to FDIC backed accounts in their Commercial Banks to ameliorate concerns of counter parties, in an act of financial alchemy, transmuting the lead of notional derivative value to the gold of hard, insurance backed assets, knew we were through the looking glass.
In terms of Europe, and its troubles, we are only seeing delaying actions applied, not resolution.
The USA have failed because they never have cared for a broad structure that would benefit all citizens. We are watching now from abroad how they are still stuck in old clichees of left and right, socialist and capitalist, conservative and progressive. All these labels don't work in societies that have developed as mentioned above.
All we will be left with in the new economic world will be what another person is prepared to barter in exchange for goods, food and services without running into debt.
Take a look at how your republican led government bailed out wall street, boys!
That is the very definition of Socialism.
Read it. Learn it. Own it!
Define Republican led government?
Democrats held the House and Senate and a lot more Democrats including the President supported the bailout.
Go back and Watch Congressman Sherman tell it like it was!
But it is useless to argue about which party was more responsible, because in reality the difference between them on this issue is insignificant.
Exactly, this is what I have been arguing for years. We don't actually have a choice but to restructure the debt, sovereign and private. We need to just accept that now and move on because the pain can't be avoided.