Euro Zone: Another Crisis, Another Backdoor Taxpayer Bailout?

EconMatters's picture

By EconMatters

Exactly 20 years to the day after the creation of the European Union (EU) and the Euro currency, German Chancellor Angela Merkel successfully secured an historic agreement from all 27 current members of the EU, except Britain, forging a deeper economic integration in the euro zone on Friday, 9 Dec.


The Euro crunch summit also came away with an agreement to provide up to €200 billion ($268 Billion) in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with 150 billion euros of the total coming from the euro zone countries.


The date that the European Stability Mechanism (ESM), capped at €500 billion ($666 billion), operation was also pushed up, the pledge to make private investors absorb losses in any future bailout for a euro nation is also to be scrapped.


While this new pact might be better to prevent future such sovereign debt crisis, others (including the US, andthe IMF) view is that the summit has failed to adequately address the more immediately and urgent issues.


Ticking Euro Debt Bombs


Euro zone has to repay or roll over more than €1.1 trillion, around$1.5 trillion, debt due in 2012, with about €519 billion, or $695 billion, of Italian, French and German debt maturing in the first half alone, according toBloomberg. (See Graphic below from Spiegel with a shorter time frame sans Germany).



Graphic Source:, 29 Nov. 2011



With Euro Zone sovereign bond yield spiking to record levels, probability is quite low for Italy and Spain to refinance next year at a sustainable rate going forward as there's not an effective backstop firewall


Germany, France would most likely need to pay a much higher interest rate due to this debt crisis contagion.  Belgium is no GIIPS yet, but its sovereign bond interest rate is closing on the 7% threshold that could require external bailout aid.



Graphic Source:, 29 Nov. 2011



European Banks Need $153 Billion in Fresh Capital

There are also problems at the heart of the European banking system.


According to the European Banking Authority (EBA) in London (fromBusinessWeek),

"....Banks in the European Union must raise 114.7 billion ($152.8 billion) in fresh capital as part of measures introduced to respond to the euro area’s sovereign-debt crisis."

Back in July, eight European banks failed the regularly scheduled stress tests with a combined capital shortfall of 2.5 billion. And things have deteriorated since then.  The updated figures from EBA take into account bank's sovereign holdings through the end of September.


Step-by-step Is Killing The Euro Zone


Europe, even with the aid from the IMF, would have a very difficult time covering between the sovereign debt rollover and shoring up the banks capital structure.  Essentially, the 'step-by-step' crisis solution as described by Merkel is a killing the Euro Zone.


The European Union of course is fully aware that markets are unlikely to be in the forgiving mood without some 'bazooka'.


The inaction could suggest

  1. The actual 'hole' is a lot more substantial than figures floating in public out there.  Kicking the can down the road as far as possible is probably the only viable option in the short-to-medium term
  2. Politics truly trumps economics as Germany could be using this crisis as a cudgel to gain power and control over the EU and on the global stage.  This also seems to indicate Germany has plenty of resource for this step-by-step waiting game.  


Another Backdoor Taxpayer Bailout Across the Pond?


Germany is reportedly still against the idea of a collective Euro Bond (although Italy's Monti seems confident that Germans would eventually see the light), and does not like the European Central Bank (ECB) embarking on large-scale bond purchases, like the U.S. Federal Reserve have been doing, either.


One of the messages out of the crunch summit is that private investors would not 'absorb losses in any future bailout for a euro nation,' which could suggest banks would get 100 cents on the dollar of the future troubled sovereign debt of Italy and  Spain, etc.


So we could also be looking at yet another backdoor taxpayer bailout of the banks -- similar to the U.S. Fed's '$1.2 trillion secret loan to banks, with repayment optional) --so banks would support buying the European sovereign bonds, while keeping the banking financial system afloat.


Somebody, somewhere has to put up the money and take the loss of the Euro Zone, and it does not look like EU would rise up to the occasion.  Eventually the markets would get past the Euro crisis and the world would move on.  But it seems the European taxpayer, just like their American counterpart, could end up being the last hero standing saving the global financial system,along with the worldas we know it.


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spanish inquisition's picture

Based on previous behavior, the FED can print as much as it wants and give it to whomever they damn well please.

Also, the Fed has guaranteed $7T and lent out only about $1.2T. If they are not going to give me cash directly, I can always call JG Wentworth. I will sell the guarauntees at 50%, take the cash and lever up in the UK.

Edit: Nobody tells baby not to print

walküre's picture

All you have to ask is who benefits from this treaty?

All lenders and buyers of sovereigns are being made whole now. They sure won't go hungry /sarc

Rest of the people can live like Dreck!

swani's picture

@ Commerce Exchange

The IMF is the US and so ultimately, these new 'loans' to insolvent sovereigns, are being guaranteed by the US tax payer. We also know that if involved in the financings, the US IMF banks (JP Morgan and others) get preferred status in any sovereign bankruptcy. In light of what transpired during the MF Global bankruptcy, the 'preferred' status given to JP Morgan by the trustee has meant, that segrated client funds that were supposed to stay segregated, by law, have been taken by JP Morgan, an unsecured creditor. That doesn't bode very well for the US tax payers in the case of any future sovereign bankruptcies where investment banks like JP Morgan will have preferred status off the bat. In this situation, the US tax payers will have less 'protection' than the MF Global customers.

Plus, if the IMF gets involved, countries would lose all of their soverignty. The IMF would essentially run the country's finances and control all state assets, which basically results in the asset stripping of the said economies in order to continue to repay the new IMF loans that were necessary because the countries' GDP could not sustain the payments of the central banks's loans.  Historically, borrowing from the IMF has always been devesating for countries, as after paying the IMF, there is no capital left for growth, all state assets fall into private, usually foreign hands and most wealth extracted from those assets is exported outside of the countries. It's a great deal for the IMF banks, as this means, the taking of real assets, like Italy's gold reserves for example, in exchange for paper, which in light of all the debt, QE and other inflationary policies, has questionable future value.




swani's picture

Of course this is what will happen, as I am convinced that these people will not stop privatizing profits and socialisng losses until they are forced to do so. They will squeeze every last drop from the tax payers of the world until everyone is paving their own roads, picking up their own mail and paying taxes on breathing. They will keep going until they cannot continue.

Element's picture

Politics truly trumps economics as Germany could be using this crisis as a cudgel to gain power and control over the EU and on the global stage. This also seems to indicate Germany has plenty of resource for this step-by-step waiting game. 


I don't know why people are surprised by this, as a strong large state surrounded by small weaker states that are basically a strategic liability, are going to take control, as a matter of their own necessities and self interest.  I don't see this progression as strange or unforeseeable.  It's really the relative weakness in the other states that is pushing Germany to a dominant role.  Of course they are going run with it.