Bill Bonner

Let’s look at how the European debt situation developed.

When Europe brought out the euro in 2002, it changed everything. All of a sudden, you could lend money to Ireland or Greece without having to worry about the Irish pound or the Greek drachma. They were all using the euro, which was managed by the Germans. So why not lend to one of these peripheral states of Europe and earn a little more interest?

Things began to change fast. Interest rates in Spain and Ireland dropped. People started buying houses. Builders began putting them up all over the place. Prices were going up. It was similar to what happened in the US, but amplified. Ireland, for example, had always been a relatively poor country. But by 2007, rising house prices had turned the Irish – on paper – into the richest people in Europe.

Bust follows boom. Always has. Always will. And when the bust came to Europe, its banks were holding a remarkable amount of mortgage debt. The trouble was, debtors didn’t have enough income to pay it. In a panic, investors dumped bank stocks…figuring the banks would go bankrupt.

But in stepped governments. They tried to halt the correction. They gave guarantees. They made commitments. The told the world that they would make sure senior lenders got their money. But how? The governments were deeply in debt themselves. But that didn’t stop them. They went ahead – to varying degrees – and guaranteed bank debt.

And so here we are. Ireland guarantees its bankers’ debt. Europe guarantees Ireland’s debt. And who guarantees Europe’s debt?

And why do they bother?

Why not just let the speculators take their losses?

“There will be no haircut on senior debt,” said Olli Rehn, EU commissioner for economic and monetary matters.

They made the decision to invest of their own free will. It’s gone against them. Shouldn’t they be permitted to learn from their mistakes? Why not?

We have never heard a good explanation. And we have a suspicion that no one else ever has either. Instead, it is more of an implied threat…whispered…too terrible to think about. “Pssst… They’re TOO BIG TO FAIL.”

Oh yeah? Why? What, exactly, would happen? Weak banks would fail. They’d be quickly taken over by stronger banks. Government debt that was too closely connected to the weak banks would fail too. Paper currency may even collapse, if people feared “the whole system” was coming down.

Governments may have to come out with a gold-back currency – one that people could trust. Then, unable to borrow more, they would have to live within their means. And the surviving banks would know better than to take risks bigger than they could cover. Would that be so bad?

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Bennet Cecil

    If the Germans want to be the sugar daddy for Greece, Ireland and others more power to them. Germans have their well connected bankers who do not want bad loans to bankrupt them. Maybe German voters do not understand that their coins are being clipped.

    I hope interest rates rise and force a solution. Depreciate the Euro or dump it.

  • http://freedom00is00earned.blogspot.com Pat Donnelly

    Hi Bill
    You are still the King!

    Ireland and the rest are now on the hook! The idea is that Europe quickens integration, by tying the peripheral economies to the rest. At least, those in the EZ. Ireland and the rest will default inevitably, but by then will be glad to jump fully into the European pot. All debts paid, you see! Of course, then there will be massive explorationj of actually already known resources. But in a decade the Irish will be saying, suckered again! For 1% of the EU economy, the land area including the sea, is much larger. It will easily pay off all debts and more.

  • Kees Bruin

    Nice analysis in a nutshell! But the EU politicians and bureaucrats are so determined to keep the EMU and the EU together that they will do “whatever it takes” to save both. I think they will fail. Number one: they simply do not have the money to help out Spain and Italy. Number two: The populations in the northern countries are waking up to the fact that they are being used to pony up all that money and they are getting fed up with that, fast!
    The Euro was an unwise project from the start, and those warning about its flaws before it was launched are now seeing things develop as they forecast.
    God knows how this will eventually end, but you can bet it won’t be a happy ending.

  • freedom4citizens

    100% right Bill,

    Modern politicians are too scared to let banks fail. Their bank-paid advisors tell them it would be a disaster.
    Modern banks are too big. They are too consolidated. We need ALL banks to be SMALL banks.

  • ducdorleans

    all in all, included date and place of writing but without the title and the credits, and according to my Crimson editor, 487 words, 2845 characters …

    more is not needed for a crystal clear explanation of what has happened and is happening … and most probably also of what will happen …

    awesome, simply awesome !

  • ME

    it’s an illusion broken financial systems can be saved… by whom? how? and where is the money?
    creating more illusion by buying time is just a delusion;
    spreading poverty cancer absorbs more and more innocent but desperate people into Wall Street casino…

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