Europe debt crisis: half-life of a bailout now only four months

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  Europe is in trouble again.

Back in May the European Central Bank created a massive $1 Trillion bailout package for the countries on the fringe of Europe that were struggling with rising interest rates on their debts.

 Despite the enormous bailout package, interest rates for the PIIGS countries just hit new records today.

Irish and Portuguese government bonds fell, pushing the yields on 10-year securities to records versus benchmark German bunds, on concern European banks are vulnerable to losses on their holdings of so-called peripheral euro-region debt.

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Spain’s debt isn’t doing much better.  

 This is particularly depressing for Ireland since it has already enacted the draconian austerity measures that the financial markets demanded. In fact, all of the European nations in question have implemented austerity measures, and yet the financial markets continue to punish them.

Ireland and Portugal are the big losers for today, but Greece is still leading the pack towards self-destruction.

 “Greece is insolvent,” Bosomworth, Munich-based head of portfolio management at Pimco, which oversees the world’s largest bond fund, said in a telephone interview today. “I see it as being quite a substantial risk that Greece eventually defaults or restructures.”

 One Trillion dollars in bailouts and we are back where we started four months ago. Why is that?

  The answer is surprisingly simple.

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 Let’s start with Ireland.

Eire’s problems started on September 20, 2008, when the Irish Parliament decided to bail out the nation’s largest bank – Anglo Irish. The problems with Irish debt today was directly related to this bailout.

 Struggling with the euro zone’s biggest budget deficit relative to its gross domestic product at more than 14% last year, Irish authorities are also grappling with the ballooning cost of bailing out the banks, especially state-owned Anglo Irish-a bill that has already hit €33 billion ($42.55 billion), or roughly 20% of Ireland’s GDP.

 The math for this is far too simple – if it wasn’t for the government’s bailout of this bank Ireland’s budget would be in surplus. Yet the austerity measures are aimed at causing pain for the productive part of the economy – the working class.

 There are a couple lessons to be learned from this:

Lesson #1) It pays to stand up for yourself.

  At present time, Greece is paying less interest on its debt and imposing fewer austerity measures on its people than Ireland. The difference? The Greek people rioted and the Irish didn’t.

Lesson #2) Bailouts and stimulus are not substitutions for real reform.

 If the costs of the crisis fell onto the shoulders of the people who profited from the bubble, then we would see real reforms. If no one responsible pays, and the costs are socialized, then nothing gets accomplished.

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    • gjohnsit on September 7, 2010 at 11:52 pm
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    • Edger on September 8, 2010 at 12:52 am

    Another great essay from you on this topic.

    I have a question not directly related, if I may. A few times I’ve suggested that rather than bailing out wall street here over the subprime mortgage mess they created for themselves and everyone else, the US government could instead have paid off every mortgage in the country, subprime or not, for less money (only about 12 trillion) than the apparently 18-20 trillion (h/t Matt Taibbi for those #’s) they gave wall street, on the theory that it would have restored the value behind the CDO securities and thus saved wall street while tremendously boosting the consumer driven economy as the money would have gone directly to the mortgage holders while at the same time lifting a huge debt weight from all those homeowners who would then have had an equivalent amout of disposable funds to spend any way they chose.

    I’m no economist, however. Would that have worked, in your opinion?

    sorry for the long run on sentence, btw…  

  1. the lessons are.

    Out here in the Great State of Wishy-Warshy, Pacified Northwest, a bunch of Gate’s & Broad Billionaire Astro-Truf Orgs are doing a great job of blaming teachers for how fucked up education systems are …

    how many teachers are in charge of budgets of millions and tens of millions and hundreds of millions?

    Yawn … the REAL story is the complacency & lethargy & apathy of Washington state teachers & the incompetence of our union leadership against these Billionaire’s Boys Club (google with “ravitch” ) astro trufers.

    oh well.

    rmm.  

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