The members of the EU are sinking under the weight of their socialist ideals and entitlement programs, though they are quick to blame the United States for their problems. In fact the burden of the sacrifices needed to support their Socialist society is the problem and we are helping to shore them up with our own borrowed money.
There is a deal, however, and it has markets around the world on the uptick, but is it a good deal or is it delaying the inevitable again?
The deal is mostly about bailing out Greece, but Italy is right behind and you can expect to see this problem reappearing in a couple months.
There are three parts to the deal.The first part is an agreement to borrow $750 billion from the private sector or China to leverage the Economic Financial Stability Facility. The ECB doesn’t have the money and can barely keep up with its bond buying from Spain and Italy.
The second part is to recapitalize 70 banks, mostly in Greece and Spain, giving them 106 billion Euros to bring their core capital up to 9%. It’s marginal, but it’s something. It’s not that the banks need it. It’s a way of forcing funds into the banking sector.
The third part is the Greek default, which has now been upgraded from a 21% cut to a 50% cut. The deal was negotiated by the IIF, a membership organization which represents banks but can’t commit them to anything. The IIF member banks are ultimately going to have to make their own decisions on whether they’re going to tender their holdings of Greek debt into a new exchange, and if so how much of their debt they will tender. Chances are not good, in fact, there’s no chance.
In other words, to make this work, the EU is going to have to print more money, borrow from China, and require taxpayers to bailout the big banks to the tune of trillions of dollars.
If Andrea Merkel looks happy on a given day, the markets rise, but that doesn’t mean there is anything behind the smile.