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**Posted by Phineas
You know what they say, don’t you? A trillion here, a trillion there, and pretty soon you’re taking about real money.
James Pethokoukis posts about the risks for the US taxpayer in the Euro crisis, pointing that, contra Fed Chairman Ben Bernanke (1), the US bailout of Europe is on. I’ll refer you to Pethokoukis’ article for the details, but the gist is this: the International Monetary Fund, to which the United States is far and away the largest contributor, has already loaned Portugal, Greece, and Ireland (three of the five PIIGS countries) roughly $100 billion, of which our share is $20 billion. Petty cash these days, you say? Hah! We’re not done yet…
If the two biggest PIIGS, Italy and Spain, come to the IMF trough, their needs may exceed the IMF’s reserves, so the EU has agreed to loan hundreds of billions to the IMF, which the IMF could then re-loan to Spain and Italy (2) — loans totaling as much as $1.3 trillion. (They don’t call them “PIIGS” for nothing.) Since this is a loan to the IMF, the US taxpayer would be on the hook to European lenders for roughly 17% of that amount in the event Italy and Spain default, or as much as $220 billion.
Makes you wince, doesn’t it? But wait, it gets better!
The Fed is hedging their bets via currency swaps with the European Central Bank. Supposedly, in the event of a default by the borrowers, the ECB could limit US exposure by buying dollars, even if it meant devaluing the Euro through printing as much needed. But that assumes the Euro and the ECB even survive a real crisis. If they don’t, we’re on the hook for it all.
I’ll let James summarize:
U.S. taxpayer exposure is $220 billion via the IMF. That’s scary enough. But then you have the Fed. Lachman notes that the counterparty to the potential $600 billion in swaps is the ECB and that “one must suppose that the European Central Bank would be able to buy whatever quantity of US dollars that it might need to repay the Federal Reserve.” Unless there is a complete euro collapse and then there might not be a ECB to repay anybody. So in addition to a global depression and 20 percent U.S. unemployment, America [‘s exposure] would be nearly $1 trillion.
The insanity of it all becomes clear when one realizes this is like nothing so much as giving an alcoholic another bottle of booze and trusting himself to go on the wagon later. Really. This time he’s serious.
European nations have loaned Greece billions time after time, and yet the Greeks continue their profligate social spending and never reform. And the problem is spreading, as Italian and Spanish finances near collapse. But, instead of recognizing the desperate need to find an orderly end to the Euro so that debtor nations can devalue national currencies as much as needed to grow their way out of debt via exports, they keep trying to save it by buying their way out of debt with more debt. This only delays and makes worse the inevitable end: massive defaults, bankruptcies at major banks, and social chaos.
Now we’re getting into the act in a potentially very big and very harmful (to us) way. And on top of our own horrendous debt.
There is no easy way out of the international debt crisis, but surely the way to start is to stop being stuck on stupid.
(1) Sure, Ben, we won’t bail them out directly. We’ll just do it through our seat at the IMF. That makes all the difference in the world. And I bet you’ll respect us in the morning, too.
(2) Anyone else reminded of a shell game?
(Crossposted at Public Secrets)