European Debt Crisis: Serious Action!

Source: Thinkstock/CNNMoneyIn its strongest move yet to combat Europe’s credit crunch, the ECB yesterday infused €489 billion euros ($638 billion U.S.) as 3-year loans into over 500 banks across Europe.

For Europe, the regular season is over. No more smack talk. No more taking on pushovers like Greece or Ireland. You are at the big dance now. This is the playoffs. Its time to put up or shut up!

What is the purpose of the loans? Will this action finally wrestle Europe’s 19 month old debt crisis under control?

The EU’s First Post-Season Action

Banks were encouraged by 1% interest rates yesterday to draw from a temporary fund (EFSF) set up by the EU. The ECB had expected a €300 billion euro draw from the fund.

They got a much stronger response. It was actually more than the ECB’s published €440 billion euro lending capacity but less than the €780 billion pledged by EU member states.

The ECB called it a “one-day liquidity-providing fine-tuning operation”.

Banks flocked to it like bees to honey.

Another ECB loan offering is scheduled for Feb 29th next year.

What is Europe’s Problem?

Europe has two fundamental debt issues:

  • Private sector debt funding
  • Sovereign debt funding

Governments and the private sector compete for the same pot of gold. When there isn’t enough cash to go around both have trouble paying their bills.

That is what is happening throughout Europe today.

When you and I can’t afford to pay our bills we say we are broke. When governments and corporations can’t pay their bills they fashionably say its a “liquidity problem”.

Yesterday’s loans are the European equivalent of action taken by The Fed in 2008 to save the U.S. economy after Lehman Brothers collapsed. That bankruptcy began the Great Recession we still suffer from today.

Europe At the Crossroads

There is no turning back now.

Nearly €500 billion euros have been unleashed into banks all across the region. The survival of the euro itself depends on how those banks spend that money.

The EU has turned control of its own destiny over to those banks.

The Great Debate

Many economists have hailed yesterday’s action and feel it was long overdo. They believe an American style approach to debt is Europe’s only hope.

Germany’s Angela Merkel has long opposed the American approach. She is steadfast against direct bailouts to spend-happy nations, like Greece, who got themselves into deep sovereign debt trouble through their own foolishness.

Germany has staunchly advocated strong austerity measures to deal with Europe’s sovereign debt.

Yesterday’s action was an end-around play, that Germany agreed to, which ignores austerity and takes the American approach.

The EU’s Opponent in the Playoffs

The team the EU faces is big and burly.

The EU weighs in at only €780 billion euros.  The European Debt Crisis weighs in at €1.1 trillion in sovereign debt alone that come due for payment or refinancing in 2012.

The EU has to be considered the underdog in that fight.

But the EU has a backup quarterback, a permanent bailout fund (ESM), waiting in the wings to replace the EFSF and lead the EU to victory.

But that quarterback won’t be available until at least July 2013, barring injury, and its lending authority set at €500 billion euros. That is a long way off.

Will it be enough?

Conclusions

Yesterday, Europe took an irreversible step to fight the continent’s debt problems. It has an undersized relief fund fighting an oversize debt problem.

€489 billion euros worth of “liquidity-providing fine-tuning” is out of the EU’s coffers and into the banks.

It was reported by Reuters that €116 billion alone went to Italian banks to keep Italy above water. A lot more money was borrowed yesterday than expected. That leaves less for later.

Why so much was borrowed remains a point of speculation and creeping doubt about the size and scope of Europe’s debt problem.

You see, Europe has two fundamental debt problems… one public and one private.

Its not all sovereign debt. Businesses and others have their own loans to pay off. Businesses desperately need cash to finance the  expansion necessary to rebuilt Europe’s economy.

The big unanswered question is this:
Will there be any euros left for governments to pay or refinance their sovereign debts when they come due, or will all of it already be gone?

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Dec 22, 2011, in Debt, Debt crisis, ECB, EU, euro, european debt crisis, eurozone, news, Politics and tagged . Bookmark the permalink. 2 Comments.

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