Finally, a Real European Bailout!


". . .the EU did a U.S.-style bailout—one with a quintessentially American, trillion-dollar price tag."

At last, the EU has decided to do a U.S.-style bailout—one with a quintessentially American, trillion-dollar price tag. "[The agreement] will ensure that any attempt to weaken the stability of the euro will fail," said European Commission President Jose Manuel Barroso. Yeah, but for how long? We wonder if Barroso noticed that the euro finished on a downswing yesterday (see chart below), even as the ink on this latest deal was drying. Still, we hate to rain on the EU's parade, and even if the mother of all euro bailouts failed to inspire a show of confidence in the euro, it nonetheless did pump up the world's stock exchanges with trillions of dollars' worth of dubious new valuations. European shares registered their biggest single-day gain in a year-and-a-half, and U.S. stocks were not far behind.

June Euro FX

This bailout is a far cry from the paltry $60 billion credit line provided to Greece just a couple of weeks ago. We'd noted at the time that trying to do these rescue packages on the cheap would only invite doubt and derision. Probably the last thing those humorless stiffs in Brussels want is derision, and so no one should have been surprised to see them throw caution to the wind by ponying up a proper sum for a pan-European rescue. Greece will now be less likely to get kicked, punched and insulted when it heads for the discount window, and Spain, Portugal Italy and Ireland won't have to worry so much that all of the rescue money will gone by the time Greece is done with it.

It's hard to say how long the good feelings will last, though, since we know from America's experience that even a trillion dollars doesn't go very far when the problem is perceived as bottomless. The cost of the U.S. bailout was estimated as high as $14 trillion, soup-to-nuts, and what did it get us besides a relatively modest blip in the Great Recession and a Fed balance sheet that remains a ticking time bomb. Would the bankruptcy of the PIIGs be an even bigger event than the collapse of the U.S. banking system? We think the question is moot, since either would trigger the other. Meanwhile, we're none too eager to short stocks at the moment, as, with the EU and Germany finally throwing in the towel on funny money, stimulus is headed toward a civilizational high. A trillion dollars in newly minted mind-money can only lower the threshold of what our best and brightest financiers perceive as "safety."

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