Saturday, June 9, 2012

Throwing Good Money After Bad

Spanish banks have been thrown a (temporary) lifeline by the European Union.  The Spanish banks now a have a $ 125 billion loan (?) from the EU to prevent a collapse of the entire Spanish banking system.  Spanish banks got in trouble lending heavily in the Spanish residential housing boom.  But, their big trouble now is that the Spanish government has coerced the banks into buying Spanish government debt.  That practice, no doubt, will continue.  So Spain sells more government debt, the Spanish banks buy that debt, and other European nations underwrite the Spanish banks.  To spell out the obvious, the EU has just bailed out (temporarily) the Spanish government.

Within a week or two the Greek bailouts will probably come crashing down and Eurozone will begin the process of unraveling.  The $ 125 billion is intended as a firewall to keep Spain from going down with Greece.  All this $ 125 billion will do is keep Spain from making the decisions necessary to slow the rapid disintegration of their economy.  Now they can make it for another few months.  Why upset the applecart with a few reforms?  After all, Germany hasn't run out of money yet. 

Yet is the key word here.  Germany is now on the hook for Greece and Spain, as well as Ireland and Portugal.  Gradually, Germany is being sucked into absorbing the costs of the welfare states in all of these countries.  The truth is that Germany cannot afford their own welfare state, so absorbing the costs of other welfare states will simply hasten Germany's economic decline.

You have to wonder what France is putting into the kitty on this deal.  France is broke and has nothing but its arrogance to offer the floundering European Union.

It will be interesting to see how German and French bond auctions go after this additional bailout.  At some point, rising yields will hit both Germany and France and folks will begin to find it difficult to distinguish German credit from Spanish credit from Greek credit.  None of it will be any good.

But for now, this will give the appearance of a fix to what ails the Eurozone.  The Obama folks should be delighted, though, in reality, it won't do anything for America's economic woes, which have nothing to do with what is going in the Eurozone.   Markets should react favorably until the giddy feeling slides into a dulling headache once more.

None of these guarantees, bailouts and so forth can do anything but postpone the day of reckoning for the out-of-control spending habits of Eurozone governments.  Promises to pay wear thin when nothing is ever paid.

The US will be having these same discussions with Detroit, California and Illinois very soon -- perhaps before the year is out.  It will be the same tired arguments.  "This is a national problem," it will be argued.  Those who have behaved frugally will be asked to underwrite the profligate.  That's what's happening in the Eurozone and the same discussion is headed our way.