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Big Bank Bailout: Why You Will Be Asked to Pay

Written by Gary North on November 30, 2011

The politicians in Europe are planning another summit meeting on December 9. The more summits they have, the more it becomes clear that they have no solution. If they did, they would need only one summit.

Matthew Lynn nails it: “Every week we get another big search for a smart-sounding scheme to rescue the project. Every week, officials proclaim they have found it — when, of course, they haven’t really.”

The latest plan is to get other nations to pay for it. No kidding! The savior is the International Monetary Fund. It will use its money to lend to Italy. Italy of course cannot and will not repay.

Here is the situation.

Italian borrowing costs have now broken decisively through the 7% barrier. At an auction on Monday, the country had to pay 7.3% to get away a small bond issue of 567 million euros maturing in 2023. A year earlier it paid just 2.9% on bonds of similar duration. If my borrowing costs tripled in a year, I’d be broke. There is no reason to think that Italy — with one of the highest government debt-to-GDP ratios in the developed world — can survive either.

If Italy defaults, large French banks start going belly-up. That will cause a domino effect in the world’s banking system. Anyway, experts fear this. (So do I.)

The IMF has announced a new line of credit. Italy is the obvious beneficiary.

But whatever it is called, it is not going to work. Why not? Because it puts too much financial strain on the rest of the world. Indeed, if the IMF goes ahead with the plan, it might well finish itself off as a serious custodian of the world’s financial stability.

Technically, the IMF might be able to pull it off. Under the Precautionary and Liquidity Line, which allows a county to borrow via the IMF based on its quotas to the Fund. Italy could receive as much as 333 billion euros of financial assistance over a two year period. Italy is going to have to borrow 461 billion euros over 2012 and 2013 — slightly more than the GDP of Switzerland, which is why everyone is getting so nervous — so the IMF would be covering 72% of that.

Will this work? No, says Lynn.

According to calculations by the London office of the investment bank Daiwa, that amount of money would consume 64% of the IMF’s available resources. But Italy contributes just 3.1% of the IMF’s money. So just to get this clear, a country that chips in 3% of the money in the pot gets to take out 64% at the other end, roughly 20 times what it put in. Does that strike you as fair?

Who will pay?

Many of them are significantly poorer than Italy. According to the World Bank, Italy has a GDP per capita of slightly under $34,000. China contributes 6% of the IMF’s funding, but it has a GDP per capita of $4,393. India and Russia contribute 2.3% each, but they have GDP’s per capita of $1,447 and $10,440 respectively. Indonesia is nobody’s idea of a wealthy country (its GDP per capita is $2,946) but it pays 1% of the IMF funds so it will be subsidizing a country more than 10 times richer.

True, some countries might be in a better position to afford it — the U.S. for example, which contributes 17% of the IMF’s total funds. Its GDP per capita is $47,184, so it is a fair bit richer than Italy. But does it really want to dip into its pockets to rescue what is a perfectly well-off nation at a time when it has massive debts of its own to deal with? It doesn’t sound like a policy you would want to have to defend going into a presidential election year.

The poor are supposed to bail out the rich. But it’s really worse. The poor are supposed to bail out the rich so that the rich can meet interest payments to the super-rich.

This is not about Italians. It’s about bankers.

If the IMF pushes ahead with the scheme, the entire organization could collapse amid a rolling wave of protests. That would be tragedy. If ever the global financial system needed a body to promote cooperation and stability, it is now.

The dilemma in the euro zone remains the same as it has been for months. Either Germany pays for the bailout, or the thing gets broken up. Everything else is just shouting that you’ve found a black cat in a dark room — when, of course, it isn’t there.

I ask: Why should Germany be on the hook? Why should Germany’s government pay a dime to Italy? The German government will have to borrow the money. Why should the politicians put the German taxpayers’ names on the note as co-signers?

The answer is simple: the big bankers run the show, and they want the bailouts. If German taxpayers provide this, fine. If the IMF does it, fine. They don’t care who comes to their rescue, as long as someone does. They want their money and their lifestyle. They made stupid loans, so they want bailouts. They think they are entitled. Taxpayers don’t, but they have no say in the matter, do they?

That is what the Tea Party is about: giving taxpayers more say.

Will the IMF do it? If Germany doesn’t, yes. This will let Europe kick the can until the the new unified government is unconstitutionally imposed, issues Eurobonds, and the European Central Bank inflates to buy these bonds.

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One thought on “Big Bank Bailout: Why You Will Be Asked to Pay

  1. Kevin Beck says:

    Therein lies the problem. If the banksters want to lend their money, and the loans go down, then they suffer the consequences. Instead, they will PROFIT from getting their loans repaid AND from being bailed out on the principal.

    The concept of interest is that it is based upon the amount of risk the lender feels he can take in making the loan. That interest rate is the lender's only compensation for the risk they assume, and they make that decision based upon all the circumstances that they know regarding the borrower. The interest includes an amount for the assumption of potential default. Eat it, boys!