When the economic situation becomes so poor that companies are on the verge of failing, occasionally governments will step in to offer aid. This bailout by the government is usually only conducted when officials believe that, if they don’t support the company, it could structurally hurt the overall economy. This attempt to prevent the spread of contagion through the rest of the economy can come in the form of loans or capital.
The European debt crisis continues to escalate due to the immediate needs of the Spanish banks. The Spanish government has asked for a government bailout from the European Union, since the country doesn’t have enough money to save its own banks.
To calm the markets and reassure them that the European debt crisis is under control, the European Union announced a government bailout of 100 billion euros.
The odd thing is that the government bailout is supposed to come through the European Stability Mechanism (ESM). Although it is difficult to know the exact numbers, the ESM has roughly 400 billion euros left in it, because the fund has been used as a government bailout mechanism for other countries over the last few years.
The reason the number is hard to pin down is that this money is only pledged from the members of the European Union; it is not actually there yet. The funds would be put into the ESM should a government bailout be required.
Now that Spain requires the government bailout, the nations within the European Union must come up with the money. Well, Italy is on the hook for roughly 20% of the money or close to 80 billion euros. That means that if the government bailout of Spain were to take place, Italy would have to borrow at over six-percent interest from the market, and then lend the money to Spain at between two percent and three percent. Talk about a losing proposition; and on 80 billion euros, that is at least 24 million euros lost on the interest cost alone. No way Italy goes for … Read More