Saturday, October 29, 2011

European Shell Game

Greece is saved. That much we know. The Euro banks are going to take 50 cents on the dollar for Greek bonds so Greece doesn't have to pay back what it borrowed. Hurrah!

Not so fast.

The banks that loaned Greece that money rely on Greek bonds retaining their value in order to claim the reserves they need to loan money to businesses and to pay out money to depositors at the ATM. Now that the Greek bonds are cut in half, they need to restore their reserves from somewhere. Where are they going to get that cash? Well, the European Financial Stability Facility (EFSF) is going to provide that. And where does the EFSF get that money? It borrows it.

In effect, the obligation for the Greek debt has gone from Greece to the banks to the EFSF. EFSF debt is serviced by ... members of the EU ... who can't pay their bills now. The real backstop to this is the European Central Bank which can print money.

Guess who's going to end up paying the tab and how they're going to do it.

Mach schnell mit der Druckerpresse!


SarahB said...

I actually had my 25 year-old socialist cousing tell me about how wonderful Europe was with all it provides it's people. When I brought up the story on Greece (and Portugal, and Spain, and Ireland, etc, etc), he just shook his head and actually said he hadn't heard about any of it. Greece is burning and there are kids in college that don't know it? Yah, we'll pay all right.

K T Cat said...

Sarah, when we were in Italy, our tour guide at the Vatican said the same thing. Now that social services are being cut, I wonder what their reaction will be.

Dean said...

They're all Berliners now?