Saturday, May 8, 2010

Eurozone Bailout Won't Work

European leaders, rushing over the weekend to fashion a bailout of Greece, are simply throwing good money after bad. It won''t work. It is simple arithmetic.

The Greek economy, already in deep trouble, is now in a state of collapse, replaced by rioting and street violence. Where are the tax revenues going to come from in a country plunging into chaos? The answer: tax revenues will be falling not rising. The Greek fiscal situation is going to get much worse, not better.

Greek citizens do not support austerity. Why should they? Their politicians have been telling them for two generations that they are entitled to free retirements, free health care, and all kinds of government largesse. Who pays for this? Folks that buy Greek sovereign debt. The problem is that no one wants to buy it anymore. That won't change.

The problem is the welfare state. It is not sustainable, not in Greece, not in Germany, not in the United States. It doesn't work anywhere. It can work for a while as long as you can fool people into not worrying about who pays for this stuff. But, eventually, time marches on and the costs of the welfare state move in the direction of infinity. It takes time, but the end result is inevitable.

There is no fix for Greece and soon there will be no fix for France and Germany. Hang onto your seat belts. You can only drink the koolaid for so long.

Here's a glimpse into the future. German and French banks own more than $ 120 billion of Greek sovereign debt. Guess how much Spanish and Italian sovereign debt these banks own? Try $ 1.6 trillion! How's that sound? Spain and Italian debt is getting crushed in the debt markets and they are now on the watch list to follow Greece down the road to collapse. Who is going to bail out the $ 1.6 Trillion that German and French banks now own in Spanish and Italian sovereign debt?

Letting Greece (and ultimately, Portugal, Spain, Italy, etc.) simply go bankrupt is the only viable solution. All other solutions will eventually end in bankruptcy anyway.