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The Need-to-Know Basics About What’s Going On in Europe

A no-nonsense and to-the-point explanation


The (Only?) Plan

Let’s just be realistic and admit that Greece is as good as bankrupt. The country just doesn’t have enough income to pay its debt load and keep the country functioning properly without outside financial support.

Eventually, Greece’s saviors will realize that this is a leaky bucket-like money pit. A sudden and unprepared Greek bankruptcy would shatter the euro zone unless Greece is quarantined first. The goal here would be to sequester ripple effects that would cripple Italy, Belgium, Portugal, Spain and whoever else is hiding in the closet.

Doing this wouldn’t be cheap. To prepare for a such a quarantine (which is a more diplomatic term than ejection) from the euro zone, Europe (via the EFSF) would have to prepare and fund a fund that can pay for:

  1. Defaulting Greek government debt
  2. Shoring up banks that won’t qualify for inter-bank credit
  3. Making sure Italy and the next dominos in line are safe

Statfor Global Intelligence estimates the price tag to be about $3 trillion. The chart below visually explains the above-described process. Can Europe scrape together $3 trillion?

Doomed if You Do, Doomed if You Don’t

I don’t think it matters much, because the above plan doesn’t take into account human emotions — panic in particular. European banks’ deposits at the European Central Bank already have mushroomed. This means one bank already doesn’t trust another bank with their money.

The combination of liquidity drying up and assets imploding is a lethal one, so what about those saying, “Things aren’t that bad”?

Just consider Dexia. Dexia passed the European bank stress test with flying colors but still had to be rescued. Dexia is supposed to be rescued partially by the country of Belgium, but Belgium’s national debt is already 100% of GDP. Depending on Dexia’s actual losses, Belgium’s national debt might soar to 120% of GDP just by having to bail out one bank. Do you know how many banks there are in Europe?

I expect a rocky road in the coming weeks.

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