Europe to get bailed out by the IMF?
Behind the scenes at the G-8 and NATO summit meetings, some significant decisions were made that will impact over the coming weeks.
The critical decision at the G-8 meeting and several of the bilateral meetings that took place on the sidelines of the Camp David gathering centered on the decision to plunge ahead with the bailout of the European banks in an effort to save the Euro system, with Greece still inside. President Obama is terrified that a financial meltdown of the Euro system will spill over into Wall Street and result in his losing the November elections. Behind the scenes around Camp David, Christine Legarde put the IMF squarely behind a bailout of the European banks, with the full backing of the Federal Reserve and Treasury in the United States to boost the leveraged lending of the European Central Bank (ECB) to prop up the European banks. ECB will take junk bonds and other vastly over-priced assets as collateral for loans to the Spanish, Greek and other European banks. This will offset an additional estimated $500 billion in new write-offs by bondholders of Greek debt.
The bottom line is that if Greece leaves the Euro, the contagion will spread overnight to Spain, Portugal, Ireland, and, perhaps, even Italy. So, the IMF, the Obama Administration and the ECB are all on board to further delay the reality of the financial and banking crisis through hyperinflationary measures. The idea is that the situation will take many months to fully play out, and Obama and his re-election team hope that the system will hold together past the November elections.
In his sideline meeting with new French President Hollande, Obama reached a full agreement on this perpetuation of the Euro. This is an area where Hollande and Merkel will agree to disagree. They both want to defend the Euro, but Hollande will continue to insist that the austerity must be limited and a growth program initiated. This is actually impossible to accomplish, but this is the growing perspective of the Eurosocialists, including Hollande and his colleagues in Germany’s Social Democratic Party (SPD) and the Italian Socialist Party (PSI). A majority of Greek voters are in favor of staying in the Euro, so long as the austerity is reduced.
Hollande will make another effort this week at the European Monetary Union heads of state meeting to push for Eurobonds, as one way to implement this bailout plan. Merkel will likely oppose and block this latest Eurobond argument. The total amount of assets on the books of the US Federal Reserve and the European Central Bank fall far short of the currently estimated 4 trillion euro liability of the European private banks.
This was the single-most important decision taken at the G-8 meeting, and it was a deeply flawed decision that will have severe consequences. For Obama, the crucial question is: Will the consequences hit before or after the November elections in the United States? This may be the deciding factor in the outcome of those elections.