Where Do They Think The Money Comes From?

Nobody talks about the European bailout fund anymore (EFSF).  Apparently, only two weeks after the "historical" meeting in Cannes, the Europeans seem to have given up their dreams of having their debts paid by the likes of China, India and Brazil.  After all, how fair would it be for a country like India, where many leave on less than $1 a day, to bailout rich Italy?

Or have they? Someone said that politicians never change, only voters do.  They don't want to fund the EFSF? No problem, we have the IMF.  Never mind that the IMF is supposed to intervene as a lender of last result to bridge liquidity gaps during a currency crisis (Europe does not have a liquidity but a solvency problem and there is no currency crisis at this point).  The objective, as with all of these plans, is to separate non-European taxpayers from their money, preferably without alerting them first.

Listen what the president of the World Bank said yesterday (full interview in the link above):

The U.S. administration, in discussions with lawmakers, “will want to make sure that actually the taxpayer isn’t doing a bailout of Europe,” Zoellick said. “And I think the mechanisms through the IMF and others certainly can do that.”

If the IMF lends money to Italy and Italy defaults, the U.S. taxpayer is on the hook for about 20% of the losses.  Mr. Zoellick, like a good politician, excludes the possibility of default in order to make his solution look risk-less, it is not.

If you think this sin is unique to the World Bank, you may also think again.  The current debate about ECB intervention is similar.  Those who need the bailout and/or those who will not be responsible for the losses are trying to convince the German leaders to force the ECB into financing Italy, Spain, and the others in violation of its own charter.  Why not? they say, the ECB can print money and buy the bonds.  Is that it? Yes, if it works.  However, if it doesn't...

Germany has reason to be cautious. In the event that Italian, Spanish and other bonds had to be written down the way that Greek bonds were, Berlin would have to pay the most to recapitalize the bank. That would be tantamount to a backdoor bailout, a transfer of money from German taxpayers to cover the debts of other states without parliamentary approval.

 The ECB is prohibited from financing governments directly because the Germans made that clause a condition of their participation in the Euro.  The Germans demanded that clause because they knew this day would come.  Whether or not they decide to pay the Spanish and Italian debts it is up to them.  However, it would be nice if they were first consulted by the politicians.  Unless, of course, the politicians don't believe in democracy.