Saving the Euro Could Bankrupt France
THIS saving the euro thing is decidedly difficult you know. The latest news is that if France does what might be necessary to save it, then France itself might go bust.
The U.S. ratings agency said late on Monday it may slap a negative outlook on France’s Aaa rating in the next three months if the costs for helping bail out banks and other euro zone members stretch its budget too much.
The warning, which sent the risk premium on French government bonds shooting up to a euro lifetime high, came as European Union leaders are preparing measures to protect the region’s financial system from a potential Greek debt default.
So here’s what the problem is. So Greece defaults, lots of banks lose money. Boo Hoo. But then maybe Ireland, Portugal will default? Still just Boo Hoo really. But, and here’s the biggie, this then puts pressure on Spain and Italy and if they default then the entire banking system goes down in flames.
Right, we know how to deal with this, we do two things. We stick lots of money in the banks so that they don’t collapse and we also spend lots of money on buying Italian and Spanish bonds. This brings down the interest rate they must pay to borrow money, they don’t default or go bust and Hoorah! we’re all saved.
But there’s a fly in this ointment: we’ve got to go and get this money from somewhere. France being one of the places where. But we need so much money from France that France itself gets into a very bad position: where France will face rising interest rates and thus itself might go bust/default. And unfortunately, there’s not really a cute answer to this problem: if France goes then Germany is left nearly alone trying to support the whole edifice. And even Germany hasn’t got enough money to do that.
The sad truth is that there really are some problems that just don’t have solutions.
Posted: 18th, October 2011 | In: Money Comment | TrackBack | Permalink
