dominos falling?? What if???

[Rich Weese]

Ok- subject is euros. Greece and Portugal are kinda messed up. Now, Germany and France are threatening to depart the euro. IF this were to happen, is euro dead? Are we(the U.S.) going to loan (read- give away) money to prop up the euro? Is that a better idea than to help prop up some of our own states that are failing? Is there enuff $$$ to go around? Just curious about where we continue coming up with all the money? I guess we need to buy some more printing presses. Rich

[Jon Holdman]

Speculators are not the problem. "Cutting the ground from under speculators" is a feeble and pointless attempt by weak politicians to distract voters from the reality. The reality is Germany is going to have to pony up a bail out for German banks, just like the US did for US banks. The situation is almost identical to the US financial crisis, only the details differ. In the US case, it was an influx of cheap money into the housing market. The resulting mortgages were packaged and sold. When their true value became apparent, various big insurance companies, brokerage companies and banks discovered they had a lot less money than they thought they had, and had to be bailed out by the Feds. In Europe's case, it was cheap loans to your weaker economies: Greece, Spain, Portugal, Ireland, and Italy. Like US home buyers, they borrowed all they could. Like US home buyers, they're now discovering they really can't pay back all the money the borrowed. Like the US situation, it is ultimately some very large institutions that bought this debt (CMOs etc for the US situation, government bonds for the European situation.)

Greek citizens are rightfully upset they're going to have to feel the pain of their government's extravagance. That's a lot like US citizens who are paying their mortgages being upset with having the banks bailed out and people who bought houses they really couldn't afford getting bailed out. Only the targets of the ire are different. Also like the US, though, the citizens of the countries where credit was suddenly cheap did receive the benefits. Both direct, if you were the one doing the borrowing, and indirect as a result of the economic growth generated by all this cheap money.

Unlike the US, there is no central European authority to deal with the situation. Individual country governments must take action. Every country has their own agenda. There is no equivalent of the US federal government nor the US Treasury. So, there's nobody to cram the nasty medicine down their throats. The European governments have dithered as this situation has unfolded, and continue to dither. This is going to be the financial crisis Part Two, and may be just as nasty. A Greek default on at least some of its bonds seems entirely plausible, with the corresponding pain to German, French and other countries big banks. A breakup of the Euro also seems possible, though I'd say there will be a lot of effort to stop that. If Greece had their own currency now, and their bonds were denominated in that currency, they would simply devalue their currency, reducing the value of their bonds and making them easier to pay back. Without that option, the likelihood of a default is, IMHO, increased.