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Urgent Stock Market Message

Europe’s Bank Bailout Bill: $3 Trillion

Politics / Credit Crisis Bailouts Oct 23, 2011 - 02:07 AM GMT

By: Dr_Jeff_Lewis


As the European Union continues to discuss the possibility of a new bailout fund, news is breaking that any European banking bailout may cost as much as 2 trillion Euros, or $3 trillion.  The $3 trillion sum, which would be raised through the EFSF, may also be charged to the IMF.

International Bailout

US taxpayers may have received the short-end of the stick in bailing out troubled banks in 2008 and 2009.  Under TARP, the US government purchased securities from banks in exchange for equity stakes and long-term preferred share holdings.  The program was profitable, depending on who you ask, but much of the $700 billion fund found its way overseas, where it was paid to international banks to settle debts and open transactions.

The taxpayer that first bailed out American banks may be asked once more to provide a second round of bailouts.  In reports that circulated over the weekend, the IMF may be asked to provide resources toward any European bailout.  The IMF has $390 billion on hand, but due to the size and potential scope of a European bank crisis, more funds may be raised.  As it stands, the United States is responsible for little under one out of every six dollars pledged by the IMF; other nations including Germany, for example, contribute only 6%, while France and Britain provide less than 5% each.

The amount financed by larger members is typically greater as a proportion of any bailout program, as their currencies are more liquid and readily available.  In past agreements, the IMF’s programs were 20% financed by the United States, even though the share of the pool is officially only 16%.

Moral Hazard

As so many different groups come together to discuss the potential for a European bail out, many are pushing off action, or even indication of action.   Naturally, if the IMF comes to the table with $200 billion in aid, there is very little reason for Greece to pledge austerity, or the EFSF to raise more funds from Eurozone members. 

It is mostly known that the European banking system will receive a bailout, but no one is yet quite sure when a program will be in place, and how it will be administered.  Nations once aligned against a larger, international EFSF contribution have aligned to allow a modest contribution from European members.  The deficit between the banking systems’ potential losses and the amount of capital available is to be made up of write downs, which would be charged directly to European banking profits.

Anyone with a level head should see that any bailout is to be financed by inflation.  Keep in mind that the IMF pays for financing operations by calling up reserves pledged by nations and kept in central banks.  To make loans to another country, the IMF borrows from other member central banks.

Internally, the EFSF can be easily funded with ECB inflationist policies.  It would be expected that the cost of a bailout will flow either directly to the ECB, or to other member nations, which will then borrow more capital from the private markets, incentivizing the ECB to act with rate cuts and liquidity programs.  The directions are different, but the destinations are the same.

Expect volatility until Europe’s balance sheets are made solvent.  After a bailout, it will be safe to say that any potential for further deflation is minimized, and inflationary assets will be back in play.  Use the time wisely to accumulate for an inflationary lift.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at

© 2011 Copyright  Ian Fletcher - 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.

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