Grecian Formula 19

When I was younger I always got a kick out of the commercials for Grecian Formula. It was a hair care product used to cover up men’s grey hair. Just put it on and you were years younger in appearance and mind set.

After 18 European Summits that promised to fix Greece and all of Europe’s problems, in June we witnessed yet another summit to fix Greece’s and Europe’s “grey hair.”

The U.S. Stock market was up over 277 points following the summit. After each of the other summits the markets also went up. Spain was the talk of the summit, and a promise of a plan to fix Spain’s banking and debt problems was the main outcome. Time is running out for both Greece and Europe. With each passing summit the scope of the problems in Greece get larger and more complex, and the amount of money needed to fix the problems grows. Given all of this, you would think that a fix for Greece would be first and foremost on everyone’s mind. Not at this summit. Why was that?

Total Greek debt is around $1.3 trillion.[1] The problem is not the debt per se but the fact that if Greece is totally bailed out, the other countries in the Euro-zone that are having problems will want the same deal. The way the Euro-zone was set up, if one country is having fiscal difficulties the other countries have to bail them out. Since it has taken so long to ‘fix’ Greece, other countries in the Euro-zone have gotten into debt due to bad loans and overspending by their governments. As a result there are other countries besides Greece having severe economic problems. Spain is among the economically fragile Euro-zone nations. Unfortunately, however, there is now only one Euro-zone country that can realistically bail out the others – Germany.

Germany is the only Euro-zone member that can cover all the debt without having to borrow money to do it. (If Germany were to borrow money, they are currently the only Euro-zone member that has an economy strong enough to generate the cash to pay back the loan.) The other Euro-zone countries currently have such weakened economies that they will need to borrow money – money that they cannot pay back – to bail out their financially troubled neighbors. The problem is that Germany doesn’t want to be left single handedly bailing out all of Europe.

Alphabet Soup

Europe has tried an alphabet soup of fixes to try to solve the Greek debt problem:

LTRO- Long-Term Refinance Option. This was a plan by the European Central Bank (ECB) to let banks in Europe borrow as much money as they needed to cover any bad loans or funding shortfalls at very low interest rates. Normally, loans from the ECB are short-term in nature and are paid back in months. Under the LTRO, the loans taken by the banks to cover their losses could be paid back starting after 3 years. The ECB did this special loan program twice for a total of $1 trillion dollars, and still, no fix to the Greek mess.[2]

EFSF – European Financial Stability Facility. The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Euro area Member States.[3] Euro member states would make a pool of money to help bail each other out if they got in trouble. They have a target of 780 billion euros for the fund specifically to help cover Greece’s debt, but still no Greek resolution. Why? Because most of the money that countries are required to put into the fund would have to be borrowed. Currently, most Euro-zone countries’ extra cash is being used to cover bad loans made by the country’s banking system to other Euro-zone members. Even Greece, who is in need of the fund, has to put money that it doesn’t have into this fund to help bail itself out. Germany has its required share for the fund, but would be on the hook to cover the rest of the 780 billion euros if any of the other member states failed to contribute. The EFSF has yet to be funded.

ESM – European Stability Mechanism. This is the planned replacement for the EFSF. ESM will be a permanent rescue fund for the Euro- zone.[4] There is one small problem here. This fund does not exist until the European Union votes it into law. The holdup is that once it is voted into law the Euro- zone members will be on the hook to fund it. Same problem as above – who funds it and who pays if something goes wrong?

19th Summit - (no name yet) This summit produced a promise of a plan in which anyone who buys Spanish bonds would get paid back even if Spain defaults. They would get paid back by means of a new bailout fund that has yet to be voted into law, and when it is voted into law it is not scheduled to be up and running for six months. Sound familiar?

ECB - European Central Bank. The ECB has been buying Sovereign bonds from financially distressed European countries in an effort to help those countries free up cash for covering their Greek loan exposure. This isn’t working either. As the money comes in, it is consumed by other debt obligations.

ISDA – International Swaps and Derivatives Association. The ISDA declared a Greek “credit event” in order to settle the Greek CDS (Credit Default Swap) exposure.[5] This didn’t work to rescue Greece either.

Why Me?

There are only two ways to solve the economic problems of Europe and Greece. Forgive the debt and write it off or pay back the loans.

Either of these options will come back to haunt you as a U.S. taxpayer, because the only way Europe can get the money to cover the losses or write off the loans is to borrow the money from our Federal Reserve. Remember, Germany has said they will not unilaterally cover a European bailout.

If the Fed loans money to Europe, in the end you will have to bail out Europe and Greece. Here is how it works:

The Fed will print the money and give it to the European Central Bank who in turn will loan out this money to banks and countries in Europe. The ECB will give our Fed written promises to pay back the money. Because these loans are central bank to central bank, the loans do not show up as a liability on our Fed’s books. This is all legal and the Fed does this every day with other foreign central banks. The problem is that as countries in Europe fail and cannot pay the money back to the ECB, the ECB will default to our Fed. The loss has to be taken by our Fed at this point, who in turn now has to account for the loss on its books.  The only way to cover such a loss by our Fed is for our government to sell bonds. Government bonds, you may recall, are guaranteed by the American public. The amount the Fed has already loaned to foreign banks is astronomical – into the trillions.[6]

Some observers say that we here in the U.S. are only two years behind Greece due to our high national debt. If it is going to cost trillions of dollars to bail out Greece and Europe, who will be there to bail out the U.S.?  At $15 trillion total U.S. debt and climbing, if we don’t get our financial house in order there will be no “Grecian formula” to cover our debt up. Our massive level of federal debt should be giving you grey hair.

The upcoming elections are critical to our survival as a nation. Learn from what is happening in Greece and take a stand in November. Vote for those candidates who understand that there is no tomorrow if we don’t change course. We must reign in our out-of-control spending. To learn more about what needs to be done, read the new book ‘The Golden Rules of Economics‘