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Consequences of Europe’s Latest Bailouts

Posted by Steve Markowitz on March 8, 2012

The European Central Bank (ECB) has acted decisively in response to the ongoing sovereign debt crisis facing various countries.  That action included an additional €529 billion of printed money that is on top of the nearly €490 billion printed in December.  The money printing presses of Europe are working more efficiently than even the rapid acting presses in the United States.

The idea behind the ECB’s bailouts goes beyond the obvious, i.e. bailing out Greece who cannot pay back its debt.  However, the actual reason behind the bailout is to assist commercial banks in various European countries that hold Greece’s bad debt.  Once again powerful interest groups are being bailed out by Progressive governments.

It defies logic that a problem of excess debt can be resolved by creating more debt.  To believe this is akin to believing in alchemy.  At best the new debt kicks the can down the road when the problems will once again arise, but even larger.

The potential consequences of the ECB bailout is discussed in detail by economist John Mauldin in his piece titled “Unintended Consequences“.  Mauldin points out the following:

  • The ECB’s holdings of rather questionable debt that has increased fourfold in the past six months.
  • While the ECB has printed substantial amounts of money that has then been loaned at low rates to European commercial banks, these banks are not making loans to businesses.  Instead, they are buying European government bonds and earning the spread that may improve their balance sheets, but not stimulate economic growth.
  • The cost of short-term borrowing by the weak European governments substantially decreased with the ECB’s interventions.  As a result these countries have replaced their more expensive long-term debt with cheaper short-term notes supported by the ECB.  While on the surface this seems positive for the debtor countries, it is creating a dangerous situation whereby their debt will now mature in the nearer term.  This will create another crisis within a few years when the new debt comes due.
  • The bailout of Greece is not being unnoticed in the other problematic countries, including Spain, Portugal and Ireland.  This will likely lead to those countries asking for concessions requiring still additional European bailouts.
  • The ECB bailouts have placed draconian austerity measures on Greece that will further contract their economy making servicing the discounted debt more problematic.
  • Mauldin concludes that in unintended consequence of the European bailout is a higher likelihood that the European Union will be broken up.

As this Blog has proffered in the past, governments are not qualified to efficiently allocate capital (tax dollars), which is what they do when intervening with bailouts or picking winners and losers, such is with green energy companies.  John Mauldin more eloquently states this reality in the introduction to his Unintended Consequences” that is posting below.  Hold on and wait for the consequences.

“For every government law hurriedly passed in response to a current or recent crisis, there will be two or more unintended consequences, which will have equal or greater negative effects then the problem it was designed to fix.  A corollary is that unelected institutions are at least as bad and possibly worse than elected governments.  A further corollary is that laws passed to appease a particular group, whether voters or a particular industry, will have at least three unintended consequences, most of which will eventually have the opposite effect than the intended outcomes and transfer costs to innocent bystanders.”

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