Tuesday, May 11, 2010

The Greek Bailout

The stock market exploded yesterday after word of a bailout for Greece. This is fool’s gold. The bailout only increases problems. It sets the markets up for substantial declines. The bailout to Greece includes $250 BILLION in IMF guarantees. That is $50 billion in US taxpayer guarantees. In addition the Federal Reserve is sending billions to the eurozone. The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. It is the exact same problem faced by the banks in the 2008 crisis. Cash flow was negative while assets decline and liabilities increased. You do not solve a debt problem with more debt. This only kicks the bucket down the line a little. It will have to be dealt with at some point – and delaying that point only makes it worse. What is going on now is a massive misallocation of capital. This bailout ensures that the Greeks can continue with their profligate ways and it ensures moral hazard that will lead Portugal and Spain, at the minimum, to require bailouts in the near future.

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