The European Union would like us all to believe that they will be able to continue to shove all the bad debt under the rug. They’d like the world to believe that government funded, socialist entitlement programs are sustainable forever, despite the fact that more people draw on the funds than pay for them. They’d also like the world to believe that the answer to the insolvency problems of certain countries (Greece, Ireland, Spain, Portugal) is to just take money from those who are still solvent. Well, the problem with socialists is eventually they run out of other people’s money – and eventually those who are stolen from get angry.
From The Brink of Total Financial Collapse by Michael Coffman, Ph.D. and Kristie Pelletier:
Other European banks have also loaned Greece tens of billions of dollars. It is extremely difficult to determine the exact amount, but private banks in the U.S., France and Germany all have about a $40 billion exposure (loss) if Greece defaults. They are currently rolling over the debt into new loans, hoping for the impossible – that Greece will recover, or they can shed their debt to some other institution, preferably their government’s central bank.
Then it becomes the liability of the people. (We’ve already seen how that works out with TARP – the banks profit, the people suffer). The central banks will provide unlimited liquidity to the banks suffering runs or default on Greek loans, thereby limiting the damage. However, the world could ride out the storm; albeit with some significant belt tightening. The downside is that if Greece defaults, the PIIG nations fall like dominos. Again, it is hard to estimate total private bank exposure, but Bloomberg estimated in April of 2011 that U.S. private banks held a $236.8 billion exposure. Bloomberg reports that European private banks hold over $1 trillion in Greek and Spanish debt alone. Ironically, some economists are warning that Spain and Italy are very close to total collapse already. They believe that it may happen this year regardless of what happens in Greece.1 It is impossible to get accurate information from the central banks because they don’t 2 provide an accounting, but the exposure is likely in the many trillions of dollars. In the case of the U.S. Federal Reserve (Fed), American citizens are liable for any bad debt incurred by the Fed.
This is not idle speculation. The Fed recently complied with a Freedom of Information Act request that revealed that all of the $630 billion Second Quantitative Easing (QE2) ending June 30 this year directly, or indirectly went to bailing out defaulting European banks, not to U.S. banks to help the U.S. economy. No wonder small business could not get loans! Tyler Durden, writing for zerohedge.com made this staggering conclusion:
In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to U.S. borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months.
QE2 was nothing more (or less) than another European bank rescue operation! (Original in bold) Durden also provides evidence that the Fed has done this in the past to bail out the European Central Bank as well as many other private European banks. These machinations have saved Europe from going under already. However, there is no way either private or central banks can weather a PIIGS default storm. Trillions of dollars would soon disappear from the balance sheets of hundreds of private and central banks in Europe and the United States. As banks directly affected by the PIIGS’ defaults begin to fail themselves, their failure will set off a domino effect, seriously affecting banks not directly involved.