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On Europe’s bailout – marriage at gun point
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According to the news, the Euro-15 have agreed to guarantee their own banks’ new loans for an interim time.
This is clearly a sign that owing to the gravity of the events, a concerted effort is agreed upon to save the day.
This is great news that may save the common currency. However, fundamental problems still exist.
For one thing, this is only a temporary solution. Now the house is on fire, they have to do this. Otherwise, they are all dead.
The current plan stops short of having a common pool of money to support the bank-guarantee. So, again, it’s only a common pledge – that all governments will do this, at their own cost and own will.
Indeed, this is only a pledge by each country’s (15 of them) Head of state. The details, for each country, have to be agreed upon, and rectified by their respective parliaments – a process that may take a while, while the house is burning.
Once the fire is out, I am sure the usual quarrel will return.
Chances are, even before the fire is put out, the quarrel may start - what if one out of the 15 does a “half bailout?”
Even if the plan is passed, in all 15 parliaments, an easy flash point can erupt as the following:
Suppose a German bank lends to an Irish bank, and the Irish Bank fails. Who will pay this loan back?
The German government will pay the German bank – according to the plan. But doesn’t the German government deserve compensation from the Irish government – Irish tax payers? Sure, but how does the Irish pay? Do they have to pay?
There is absolute no details about how this can be handled.
The upshot is that the lending will be done very carefully – as it should be.
Therefore, this is only a half-hearted attempt. It can, at best, solve half the short-term loan problem. TED spread will drop a bit, but no where to the common 0.5% level. Maybe it will be at 2.5 – 3% in one to two weeks.
But what next?
Europe is a strange case that has a common currency, yet not a single government, or even a common constitution, nor a single working language!
Long term, it will have a lot of problems.
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