Posted 11/4/2011

THE BIG GREEK EURO MONSTER

This is a very scary fairy tale.

The scariest part is that it's all true.

A big Greek Euro Monster has been growing for years, fed Euros by the International Monetary Fund, the European Financial Stability Facility, Europe's banks and – shock of all shocks – American banks as well.

Once upon a time, the Greek Euro Monster was a little guy, someone nobody worried about.  But the Greek government fell into the bad habit of spending money it did not have.  Huge social programs created votes for politicians, but drained the Greek treasury dry – forcing it to borrow gobs of Euros to feed the monster.

As time went on, Greek politicians spent more and more aggressively while taxing more and more timidly.  But nobody in Europe made a peep since the European Union had created no mechanism to police and enforce its policy on limited deficit spending.  In the early days, even France and Germany violated the deficit spending policy.  So Greece felt that if the mighty French and Germans could ignore the policy, so could it.

Finally, the Greek Euro Monster grew so large that it threatened to topple the economy of the Euro Zone – the 17 nations using the Euro as their currency.

By 2011, Greek government debt had grown so large that it dwarfed the entire Greek economy.  Every day, the debt grew as the Monster demanded more and more Euros.  But where were those Euros to come from? 

Europe's banks were left heavily exposed by their Greek lending.  The conservative European Central Bank refused to feed the Greek Euro Monster any of its Euros.  The IMF shied away.  Who in the world wanted to lend money to a bankrupt nation?  The Chinese came in, peeked at the books, and hurriedly left holding their noses.

Attempting to pacify the monster's hunger, the Greek government issued 10-year bonds.  But the interest charges rose to a scary 28 percent.  (When interest costs get that high, they are generally referred to as "the vig.") The interest on German 10-year bonds is less than two percent.

Anyone with a keen grasp of grade school arithmetic knows that the Greek Euro Monster will devour Greece, resulting in a massive default.  The only question is one of timing.  Will the monster be fed more bailout Euros or will it not?  The so-called rescue plan will not satiate the gigantic monster; it will only delay the inevitable:  Falling into the Land of Default.

So if that is true, why are the Germans and French munchkins so desperate to come up with rescue packages for Greece?  Well, it seems that German and French banks are loaded with Greek debt.  A Greek default would put a powerful strain on European banks.  Some might fail.  Others would have to rebuild their capital reserves by sharply reducing lending – thus pushing Europe into a full-blown recession.  (Europe is already close to recession.)

And what happens to American banks that have purchased Greek bonds?  Most U.S. banks are still barely recovering from the 2008 financial crash.  And what happens to American financial institutions which have purchased Credit Default Swaps on Greek bonds?

Do you remember the collapse and subsequent government bailout of AIG?  It had purchased credit default swaps on the paper of European banks.  So when the U.S. decided to bailout AIG, a great deal of that money was sent to European banks to make good on the tarnished swaps.  What you were not told by either Fed Chairman Bernanke or Treasury Secretary Geithner was that the U.S. taxpayer was bailing out European banks as well as American banks.

Other Euro Zone countries are in big trouble.  The European Central Bank (ECB) has been buying tons of sovereign bonds from Portugal at 12% interest rate, Ireland 8.4%, Italy 6.2%, Spain 5.5% and Belgium 4.4%.  Without this ongoing ECB bailout effort, these countries would find their borrowing costs rising rapidly and their economies sinking into recession.

Thus, there five more Euro Monsters out there to contend with.

At this time only four questions remain:

1. How big a bite will the Big Greek Euro Monster take out of Europe?

2. How big a bite will he take out of the U.S. economy?

3. Will the Greek Euro Monster push Europe and the U.S. into a serious recession?

4. How soon will he start chomping on us all?

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