Saturday, May 29, 2010

Europe's Trillion-Dollar Bailout - Can It Work

International Monetary Fund logo

Image via Wikipedia

Gary D. Halbert

On April 12, the International Monetary Fund (IMF) increased the capacity of its emergency lending fund from $50 billion to $550 billion, a ten-fold increase, and may increase it to $750 billion if needed. The IMF's director stated in his press conference that the additional funding would "ensure that the Fund has access to adequate resources to help members that are vulnerable to financial crises."

In order to increase this emergency funding by half a trillion dollars (or more), the IMF moved to significantly increase the lending commitments of its member nations, of which the largest contributor is the United States. Oddly, there was very little talk about this in the mainstream press. I will discuss it in more detail as we go along. Upon learning of this huge increase in IMF funding in April, I thought to myself that the IMF must see somethingvery scary in the near future.

Scary indeed. On May 9, the European Union announced a near $1 trillion bailout package for euro-zone countries in an effort to address the "sovereign debt" crisis that began in Greece but now threatens the stability of financial markets across the region. Interestingly, of the near $1 trillion bailout, apprx. $640 billion will come from EU member countries, and apprx. $320 billion will come from the IMF. This obviously explained the need for the IMF to dramatically increase its emergency lending fund in April.

I find it more than coincidental that the near $1 trillion bailout of Europe came on the very weekend following Thursday, May 6 and Friday, May 7 when stock markets tumbled around the world, including the near 1,000-point intra-day plunge in the Dow Jones on May 6. Stock markets around the world rallied briefly after the massive European bailout was announced, but most equity markets came back under downward pressure soon thereafter.

The question is, will this massive bailout work? There are many reasons why it probably will not. Perhaps the simplest observation is, how can countries that are already running huge deficits borrow their way out of a financial crisis? But that is exactly what our own nation is doing, so we should not be surprised that Europe is following our lead. I believe this will come to a very ugly end in the next several years. Alas, here are the latest developments.

Europe's Trillion-Dollar Bailout - Can It Work

Reblog this post [with Zemanta]