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E.U. Debt Bailout Delays the Inevitable Economic and Market Crash

Economics / Global Debt Crisis May 12, 2010 - 12:44 AM GMT

By: Dr_Jeff_Lewis


Best Financial Markets Analysis ArticleIt took absolutely nothing to bring the stock markets to their knees, but nearly $1 trillion to give them piece of mind.  Yes, the European bailout may solve temporary woes, but in the end, it is nothing more than a temporary solution.

How the Bailout Works

The bulk of the money allocated to bailing out Europe's debt ridden nations is to be borrowed on behalf of other more creditworthy nations.  European officials have decided that 16 nations currently using the Euro as their currency would put up 440 billion Euro in loans, as well as a 60 billion Euro infusion from the EU itself. 

The 440 billion Euro is to be borrowed by the most solvent and largest nations and then given to Greece and Spain.  Since Germany, France, and other more fiscally responsible nations can borrow at rates far lower than Greece and Spain, the EU hopes the measure will allow the countries to solve the current fiscal issues with money due back to creditors years in the future. 

The International Monetary Fund, or IMF, will also contribute a significant 250 billion Euro investment, made on behalf of virtually every developed country around the world.  The biggest contributor to the IMF?  None other than the United States of America, which as many have seen, has fiscal problems of its own.

What the Bailout Really Solves

The bailout of Greece, Spain, and possibly Portugal solves practically nothing.  Rather than allow the three nations to go into bankruptcy, purge themselves of debt, and then reorganize with budgets that are balanced, the loans will allow the three to continue spending like nothing ever happened. 

If history is any indication, as it usually is, the three countries will continue on their perilous paths, and every Euro lent to the three will eventually be forgiven by the 16 main creditors. 

Problems Arising Already

Despite paying interest rates that are multiples less than that of the developed world, Greece is already complaining that the 5% interest rate charged on its 110 Euro bailout is far too much.  The country indicated that the rate would stifle any economic gains, despite the fact that it would allow the nation to “re-mortgage” its already existing debt at a much lower rate.  10-year Greek bonds have recently traded as high as 8.7% and are moving higher, so this 5% rate is incredibly generous at the worst.  Of course, anyone willing to lend money to a nation so burdened with debt would want at least 8%, if not more. 

Contagion Risk Now Greater than Ever

The risk of contagion, that is fiscal problems moving into other nations due to a bankrupt Greece, should only continue to grow.   Now that 16 nations are on the hook for more than $500 billion in money they've borrowed at a rate just slightly lower than the interest at which Greece will be paying them back, the chance that every nation in the EU will encounter fiscal problems has grown larger.  Though this $1 trillion package may solve issues in the short run, expect nothing more than even bigger problems down the line.  The only safe place to be, with every nation now coming to the rescue with their own cash, is in precious metals.  Stocks may fall, bonds may tank, but precious metals, the new currency, have nowhere to go but up.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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