which in reality are debts owed to German and French banks?
Why should the Germans bail out the Greeks and the Spanish?
Is the spread of "contagion" starting to taint the debt of Italy and even Belgium,
the home of the EU?
...The current Irish government has agreed to borrow something like $88 billion euros
to shore up their banking crisis.
That is about $27,000 for every man, woman, and baby in Ireland,
a rather small country with a little over 4 million people.
...a lot of that Irish debt is owed to German, French, and UK banks.
A lot more debt owed to banks than the Greeks owe,
which had everyone worried not so long ago.
...It is not about Germany and France wanting to help out Ireland and Greece (and eventually Portugal and Spain).
...It is that they are worried about their banks going belly up.
Look at how upset the UK got when Iceland decided not to back their banks.
...The Icelanders did the sensible thing: they just said no.
Yet Ireland has decided to try and save its banks by taking on massive public debt.
The current government is willing to go down to a very resounding defeat in the near future
because it thinks this is so important.
The different adjustment paths of Ireland and Iceland
are classic examples of devaluation versus deflation.
Iceland and Ireland experienced similar economic illnesses
prior to their respective crises:
Both economies had too much private-sector debt
and the banking system was massively overleveraged.
...Iceland's entire banking system was crushed
and the stock market dropped by more than 95% from its 2007 highs.
Since then, Iceland has followed the classic adjustment path
of a debt crisis-stricken economy:
The krona was devalued by more than 60% against the euro
and the government was forced to implement draconian austerity programs.
......The big problem for Ireland
is that fiscal austerity without a large currency devaluation
is like committing economic suicide,
without a cheapened currency to re-create nominal growth,
fiscal austerity can only serve to crush aggregate demand
and precipitate an economic downward spiral.
The sad reality is that unlike Iceland,
Ireland does not have the option of devaluing its own currency,
implying that further harsh economic adjustment is likely.
Bank Credit Analyst
...Iceland is seeing its nominal GDP rise while Ireland is still in freefall,
even after doing the "right thing" by taking on their bank debt.
...It is a matter of sooner rather than later
before Portugal is forced to accept the kindness of strangers.
What is remarkable is that since the Greek bailout was unveiled back in May,
instead of alleviating fiscal concerns in the Eurozone periphery,
contagion risks have actually intensified.
...Once the stabilization fund ends in 2013,
there is no way these countries can fund themselves at current debt-service cost levels.
...Debt restructuring is inevitable.
David Rosenberg
...What would happen if California and Illinois and New York came to Texas and said,
"We think your taxes should double so that we can finance our debt,
and please buy even more of our debt next year to pay for our unfunded pensions.
Oh, and while you are doing that the Fed is going to print massive amounts of dollars
(far, far more than they are now) and destroy the value of the dollar,
so your Texas pensions will be worthless.
...I do not think you can find 60 Senators to decide
that bailing out the states that let their own spending and taxes get out of control
would be acceptable with their voters.
...what the eurozone is asking Germany
(and the Dutch and the rest of "core" Europe) to do
is bail out Greece and perhaps much of the rest of the periphery,
and to assume massive deficits and rising taxes.
...Will the Germans still finance the Greeks in 2013
when they have not whittled down their deficit
and the Greeks still want to retire at 50 on full pensions?
Will the Irish decide that it is in their best interests to take on massive debt
so that French and German and UK banks are paid back?
Can the solution to a debt problem be more debt?
John Mauldin via Business Insider
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