The U.S. Bailout of Europe
When speaking of the European financial crisis, Republican presidential candidate Mitt Romney is in error when he said:
“We’re not going to send checks to Europe. We are not going to bailout the European banks“
– Mitt Romney, Face the Nation with Bob Schieffer, 6/17/2012
Contrary to popular belief, the United States is already sending bailout checks to Europe. It has been for several years.
The real question is, should we continue to do so?
IMF Bailouts and The United States
U.S. commitment to the IMF (Source: International Monetary Fund)
The International Monetary Fund (IMF) is committed to about €250 billion euros ($314 billion) to bailouts for Greece, Ireland and Portugal. It’s not contributing to the €100 billion euro bailout of Spain.
The United States is the largest contributor to the IMF. The U.S. share is 17.69% of IMF total funding.
That makes the U.S. share toward the European bailouts, so far, $55.5 billion.
The IMF draws funds using this Special Drawing Rights (SDR) formula agreed to by international treaty
The IMF has a complicated formula for determining a nation’s financial commitment. It is called a Special Drawing Right (SDR). Today, 1 SDR = $1.52 in U.S. currency.
From a U.S. perspective the IMF cannot spend much more of its money. The top end U.S. quota is set at 42,122.4 SDRs or $64 billion. That only leaves $8.5 billion left that the U.S. could spend on European bailouts. It is likely the IMF has already committed that $8.5 billion elsewhere.
The IMF is tapped out. The total amount the IMF is allowed from its 188 member nations is $361.9 billion. It already has $314 billion committed to Europe’s bailouts alone. Most of the rest is probably committed elsewhere.
Europe Only Bailout Funding
The EU’s own bailout funding sources are:
- EFSF – European Financial Stability Facility (€420 billion)
- ESM – European Stability Mechanism (€500 billion)
- ECB – European Central Bank
All of these funding sources have contributed to European bailouts for Greece, Ireland, Portugal and now Spain. The biggest bailout so far, though, is for Greece. That bailout comes from the EFSF, ECB and IMF. Combined they are called “The Troika”.
Ultimately, the intent is to make the ESM the one stop shopping center for all future EU bailouts when it comes online next month. More bailouts are likely in the future.
Many economists feel EU total bailout funding is woefully inadequate and that further “stimulus” without austerity preconditions is needed.
Conclusions
The United States already has $55.5 billion at stake in European bailouts through the IMF. Given the IMF is tapped out, the U.S. will not be drawn further into European bailouts by it.
Compared to the total amount spent so far, the United States is not a large contributor.
According to Romney and others, Europe has the means to fix its own financial crisis and does not need further U.S. help. Be that true or not, Romney’s argument that the United States should put its own financial house in order first before considering helping others is reasonable.
But what if there is a doomsday scenario with total financial collapse in Europe… what should we do? That was Bob Schieffer’s question of Romney on Sunday.
The Fed and others believe that U.S. financial institutions have minimal direct exposure to European sovereign debt, but some to European banks that do. Further, it is believed that even in a full European recession its effect on U.S. exports will only be mild.
Coupled with Romney’s, those are the reasons why the United States should stay out of the European bailout game. U.S. exposure to Europe is less than Bob Schieffer and many Americans fear.
However, should things change and the U.S. economy is seriously jeopardized by an apocalyptic European financial collapse then the U.S. may need to consider more EU bailouts for its own self-preservation.
Posted on Jun 18, 2012, in bailouts, Business, culture, economics, eurozone, Global Economy, Life, news, Opinion, Politics. Bookmark the permalink. 6 Comments.
Inform The Pundits! 
You always write informative and educational articles, thanks. One question: the $64 billion quota you wrote about, is that per year? Will the IMF have acess to another 64 billion in 6 months?
Good question… I need to research that.
I suspect that member countries must maintain their quota deposit at all times and only replace what is spent or lost in bad bailouts. Member IMF nations have voting approval power and would start disapproving future loans if the cost got to high.
An interesting and timely article related to your question appeared in today’s Bloomberg’s BusinessWeek:
http://www.businessweek.com/news/2012-06-18/brics-to-announce-imf-contribution-at-g-20-meeting-brazil-says
It’s fascinating reading.
“However, should things change and the U.S. economy is seriously jeopardized by an apocalyptic European financial collapse then the U.S. may need to consider more EU bailouts for its own self-preservation.”
I know that you know that these bailouts are not to nations but to banks. I for one am tired of bailing out banks. Under the apocalyptic collapse senario, the banks will want all debt monetized. I hope we don’t fall for that trap. I personally prefer national bankruptcy, deflationand, start over with a sound currency. The alternative is hyperinflation and the world bankers will continue in control.
If TARP is typical, then I’d much rather bailout financial institutions and the “big banks” then automakers and nations.
The big financial institutions have all paid off their debts with interest. The automakers, small banks and government entities such as the GSEs and FHA so far have not and probably not for years, or never. Taxpayers got soaked by them.
TARP, however, will make a profit for U.S. taxpayers anyway. Why? Because the “big banks” paid off their loans with interest that covered all the freeloaders and it is looking like taxpayers will make more off AIG assets we still own. All of AIG’s TARP loans got paid off this year.
When housing values eventually return all those toxic properties taxpayers own may make us a lot more money.
What should be required is that all profits made from TARP and the GSE toxic assets we now own go directly to paying down the national debt.
I read where the GAO or CBO estimated that GM even if it turned over all its profits, it will still take over 20-35 years to payoff the taxpayer. Chrysler’s bailout the taxpayers fared better under, only a small $1-3billion permanent loss. GM should have been liquidated. Ford or Honda would have bought the Chevrolet brand, and some other survivor would have gotten Buick and Cadillac nameplates. I think the dollars spent per GM job saved is some astronomical value, that it would have been cheaper to just give large welfare checks to the employees for the rest of their lives, and it would have been a cheaper taxpayer program. I am also not convinced that GM has completely turned the corner on the issues that helped sink it in the first place–unimaginative designs, and although much improved still behind in the quality game if I read Consumer Reports correctly. GM employees are hard working honest people that got caught by very poor management at the top.