Too Big to Fail? Oh Yeah...?

webstandardcss · Dec 8, 2010

How the Eurozone government debt crisis grew...

LET'S LOOK at how the European debt situation developed, writes Bill Bonner, currently in London, England for The Daily Reckoning.

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 Punt 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?
Click to expand...

Log in or Sign up

Too Big to Fail? Oh Yeah...?

webstandardcss New Member

Share This Page

Log in or Sign up

Too Big to Fail? Oh Yeah...?

webstandardcss New Member

Share This Page

Useful Searches