As most of you know, the EU (and predominantly Germany) has bailed out Irish banks after serious austerity promises were made. The problem could lie with future bailouts and the politics of it. Here are some of the possible issues as relayed by Pat Buchanan:
Angela Merkel, whose Germany is fronting much of the bailout money, has been demanding that bondholders take a haircut – lose some of the face value of their bonds – in all future bailouts.If bondholders are not compensated for deals made by banks and backed by the government(s) then a tidal wave could ensue that could ensnare all of Europe and even the U.S. Now, this is somewhat fatalistic, but it is almost definite that Portugal will also receive a bailout (which is nothing), but if Spain follows then we might need too keep our heads down:
Sunday, the EU agreed to consider it for all bailouts after 2012. But we may not get there before nervous investors decide to dump their bonds first and the European house of cards comes crashing down.
For if bondholders know they will be among the first victims burned in bailouts in 2013, they may suspect a singeing even before then. This will impel them to start shedding the bonds of any nation with deficit and debt problems, which will deepen those deficit and debt problems.
...unlike America, Spain is on the edge of a debt crisis. The U.S. government is having no trouble financing its deficit, with interest rates on long-term federal debt under 3 percent. Spain, by contrast, has seen its borrowing cost shoot up in recent weeks, reflecting growing fears of a possible future default.
Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not. Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere.
