Author: John King, Quacera
Covestor model: QPM Radar
Disclosure: None
Debt Trap definition: taking on new debt to pay off existing debt.
The world’s bankers and politicians have used their countries’ large ownership of PIIGS debt as the reason not to allow any of them to default. They base their arguments on the idea that bailouts actually offer a solution when all that really happens is eventual cost increases when default finally occurs.
Allowing more loans to a profligate spender doesn’t work in any venue whether the banks are playing at credit cards or mortgages or even sovereign debt poker – where the house can add unlimited chips to the pot. As the non-contagion spread to Italian banks over the weekend we eagerly awaited the pooh-poohing from EU ministers and the assurances that they could tee up another bail-out plan. The never-ending protection racket benefitting bankers and foolish borrowers has slipped from its orbit and will continue to widen the black hole into which much of the world economy will be absorbed. That they are now blaming short sellers and anyone who seeks to protect their own wealth would make us laugh were it not for the fact that U.S. political elites are saying the same things.
To add smoke to the emergency meeting called for Monday morning in Brussels, it was dubbed a “coordination effort” and not a crisis. Meanwhile the EU suspended international collateral standards set in stone 2 years ago in order to prevent Portugal from falling into the Atlantic; Greece announced that even before the first of the new round of payments were made, it had failed to meet the fiscal requirements of the previous one and the Banks in Italy were scrambling to prevent a run.
Much of this could have been avoided if, instead of adding bad debt upon bad debt, the central banks had bitten the bullet and supervised as orderly a default as possible. Certainly there would have been pain but the actions of those whose tender hearts just couldn’t bear the thought of losing an election along with their places and preferment’s will see that happen anyway. That they will have sacrificed the livelihoods of their citizens in the effort, we hope, will not be lost on the voters. Unfortunately history also shows that the world goes through great turmoil coincident with these situations.
