Euro crisis: Where are they getting the money to do that?

Hat tip to The Big Picture for this entertaining, Australian, look at the Euro crisis.

From the transcript –

BRYAN DAWE: How much does Greece owe, Roger?

JOHN CLARKE: $367 billion.

BRYAN DAWE: Correct. And who do they owe it to?

JOHN CLARKE: Mostly to the other European economies.

BRYAN DAWE: Correct. How much does Ireland owe?

JOHN CLARKE: $865 billion.

BRYAN DAWE: Correct. Who do they owe it to?

JOHN CLARKE: Other European economies mostly.

BRYAN DAWE: Correct. How much does Spain and Italy owe?

JOHN CLARKE: $1 trillion each.

BRYAN DAWE: Correct. Who to?

JOHN CLARKE: Mainly France, Britain and Germany.

BRYAN DAWE: Correct. And how are Germany, France, Britain going Roger?

JOHN CLARKE: Well they’re struggling a bit, aren’t they?

BRYAN DAWE: Correct. Why?

JOHN CLARKE: Well ‘cause they’ve lent all the vast amounts of money to other European economies that can’t possibly pay them back.

BRYAN DAWE: Correct so what are they go to go have to do?

JOHN CLARKE: They’re going to have to bail them out.

BRYAN DAWE: Correct. Where are they getting the money to do that Roger?

Well, where are they going to get the money from?

It should be obvious now, why “no euro country will be allowed to renege on its debts”.

Once the issue of ensuring that, long term, member states’ fiscal policies are congruent with the constraints of Euro membership, should the ECB pay off some this debt? Bearing in mind Walter Bagehot’s maxim – “any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank”, this kind of aid should only come after serious and painful (so as to reduce moral hazard) reform in deliquent Eurozone states. Due to the web of interconnections all member states would benefit, either directly or indirectly, and the spectre of default would be lifted.

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  • Pete Baker

    “Once the issue of ensuring that, long term, member states’ fiscal policies are congruent with the constraints of Euro membership, should the ECB pay off some this debt? Due to the web of interconnections all member states would benefit, either directly or indirectly, and the spectre of default would be lifted.”

    Mack

    “Once the issue of ensuring that, long term, member states’ fiscal policies are congruent with the constraints of Euro membership…”

    There’s the rub.

    And who, in your virtuous circle, funds the ECB intervention?

  • Mack

    Pete, I’ve modified that sentence slightly just a second ago. That process is occuring now with painful deficit reduction measures being put in place in the PIIGS, obviously more is needed to prevent a recurrance. But once that is in place, if politically it can be delivered, is debt-deflation and default on the periphery in anyone’s interest? I would say no.

    I would guess that it is possible, somehow, however contorted, for the ECB to fund it with newly created cash. I’m not sure what a valid mechanism for that would be. Even if they have to lend the new money to an external entity & accept some dodgy collateral for legal reasons (feck it – we could use Nama for that purpose!) that would then purchase the bonds and write them off.

  • Mack

    To clarify “obviously more is needed to prevent a recurrance” – more is needed as in structures, checks and balances.

  • Alias

    Technically, the ECB can’t print money since the Maastricht Treaty doesn’t allow it inject liquidity by purchasing the government debt of the eurozone member states, so monetising the deficit is one expansionist monetary policy that it can’t inflict on its economies. However, it can buy sovereign debt on the open market which would amount to the same thing, i.e. liquidity expansion. The ECB is already engaging in a form of quantitative easing by setting the lending rate at 1% and the deposit rate at .25%. If the treaty is tweaked to allow it to buy sovereign debt then that debt will default to its shareholders – who are the states whose debts it will have bought, so that will rather obviously do nothing to reduce the amount of sovereign debt in the EU.

    It’s clear though that the policy of contagion prevention means that Ireland does not now have the option of defaulting on the 400 billion of eurosystem debt that it converted into sovereign debt (never mind how they fiddled the books to hide this sovereign debt), so those europhiles who said “Well, if worst come to worst we can always default” in regard to containing within the state debt owed by private banking businesses to other private banking businesses in the eurosystem were talking their usual nonsense in order to entrap the gullible public into converting themselves into serfs for eurosystem banks.

    When Ireland is forced to default on this debt it will mean that it will have to do so with the declaration that it intends to leave the EU, and immediately abrogate the treaties thereafter, so every cloud has a silver lining.

  • JaneJeffers

    If, as they state in the video, countries owe each other huge amounts of money, a lot of that debt can be annulled.

    They give the example that Spain owes Italy 41 Billion, and Italy owes Spain 27 Billion, and neither can pay.

    Well the upshot would be that Spain owes 14 Bn to Italy which may be more manageable.

  • Mack

    Probably need to take into account yields / current value of the bond and not just the principle to be repaid. I don’t know if they’ve done that.

  • Mack

    It’s a tad extreme to regard the €400 bn of guaranteed liabilities as sovereign debt. The guarantee will end in a few months and those liabilities will still be on the banks balance sheets rather than the governments.

    Although, then again, perhaps not. The government have demonstrated that they will make bank debt sovereign in a crisis – the bankers have carte blanch to run up whatever debts they like in future knowing that taxpayers will foot the bill.

  • Mack

    Also the creditors aren’t European states, but banks resident / regulated in other European states – so I don’t think they could simply cancel the debt out.