Europe On The Brink

Sunday, August 7, 2011
By Paul Martin

After a week that saw $2.5 trillion wiped off global stock markets, European policymakers held a series of emergency conference calls on Sunday to discuss the twin debt crises in Europe and the USA that are causing market turmoil, and stoking fears that the Depression might actually affect some members of the plutocracy (e.g. bondholders).

Because Spain’s and Italy’s economies are in severe trouble (i.e. overloaded with debt), yields on Italian and Spanish debt (i.e. bonds) have soared to 14-year highs. That’s great for investors, but they hold $2.57 trillion worth of Italian bonds alone, which is 120 percent of Italy’s national output. Hence Italy is already bankrupt, and must inevitably default. Spain will too — in which case investors will end up getting less than they expected.

To continue servicing those bonds, Italy must pay out so much that Italy is due to run out of cash by the end of September. Italy’s funding requirement this year is larger than the entire stock of Greek debt. (England is also bankrupt, since its debt is three and half times its GDP, but England is not part of the EU monetary union.)

Therefore investors (bond holders) are demanding that the European Central Bank bail them out immediately by buying their Spanish and Italian bonds. (The media portrays this as “rescuing Italy,” but only bondholders get rescued. The Italian masses will be crushed.)

The ECB is in a bind. If it bails out investors by buying their debt, then the ECB will dump that debt onto the Spanish and Italian masses in the form of slashed social programs and mass privatization binges (i.e. “austerity”). The ECB is not sure it can get away with this. If the ECB goes too far in screwing the masses, it will crash Italy’s economy (the eighth largest in the world), which would threaten the entire EU monetary union. Four out of the 23 ECB governing council members, including powerful German Bundesbank chief Jens Weidmann, voted against the bond purchases. ECB chief economist Juergen Stark and the Dutch and Luxembourg central bankers also apparently dissented.

However, if the ECB does not bail out investors by buying their bonds, then that too could destroy the monetary union (and thus the ECB’s power) since Spanish and Italian bonds will become so down-rated that Spain and Italy would be locked out of the EU market.

In Germany, Angela Merkel may exhaust her remaining political capital if she throws more taxpayer money into buying European debt.

The Rest…HERE

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