Eurozone Bailouts - When Does Too Big To Fail, Become Too Big To Bail?

ShaneSwift
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Lieben Der Kuche Ltd
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Dealing with European suppliers and currency exchange as part of our business, the economies of Europe are of interest to our day to day operations, and one question that’s been niggling away for some time now in respects of Greece, Spain, Italy and Ireland and no doubt others to follow is this.

When does the rest of Europe, (i.e those not on the brink economically speaking) say enough is enough in respect of bailouts?

Now I may be looking at this too simplistically but with the sums involved in the committed bailouts being close to £600bn already, which when you consider are not sufficient to the current problem anyway, and that Spain and Italy have some £2.1 trillion in debt alone, which is 20% of the total annual GDP for all of the Eurozones’ 27 member countries combined, it makes for some worrying reading indeed.

If we likened the Eurozone bailouts to personal finances, the risk to creditors is so staggering that not even loan sharks would touch this one. There are only so many legs a loan shark can break but we the tax payer are, without referendum being committed to continue bailout after bailout.

Faith in Politicians

Laughable my even suggesting this I know but when the taxpayer is left holding the £2bn loss on Northern Rock in order to allow Richard Branson to leave the crappy toxic waste debts behind and buy himself the nice, toxic free profitable part of the business do we really expect our politicians to fair any better in dealing with Greece et al?

We are not just talking about a small financial obligation for those lending the money, we are talking huge sums, which could by their very nature, end up bankrupting more member countries if the likes of Greece, then Spain, then Ireland then Italy all defaulted and fell out the Euro. Add to this the growing sentiment in Greece to take the money and run, and stick one to Europe, are we really thinking this is a good idea?

No one really knows how bad Greece bowing out the Euro will impact the other member states and (rather selfishly I guess) us here in the UK, and all the economists and politicians can do in their current analysis, is guess.

Greece bowing out could wipe a few £bn more of the stock markets, push the Pound up against the Euro and that might be the end of it. Or, it could start a chain reaction that sees a viscous cycle of stock market slumps, currency devaluations and credit rating downgrades fueling yet more stock market slumps and so on, until more member states fallout just like Greece, which kick starts another viscous cycle after Spain, then Ireland then Italy.

Back to the Original Question

So then, if we face a ruinous outcome if Greece, Ireland, Spain, and Italy all fall by the wayside, and we cannot possibly commit ourselves to that scenario, nor afford the money to bail them all out effectively, then what?

When does too big to fail, become too big to bail and is it not prudent for the stronger economies (whom currently have a fighting chance of growth) to have more than just a sense of winging it to the bailout situation plan and a ‘lets just take it one step at a time’ attitude?

Should we not look ahead, assume for the worst (hope for the best) but decide which is the last domino to fall that we would consider the point at which we say No, Non, Nein, Nee, Nej, Não?

Risk Exposure

As with any creditor/debtor relationship there is a limit to how much risk and exposure as a creditor, you would be willing to undertake.

We all do this in our respective businesses day in day out, and our suppliers do it in return to our businesses.

We want to limit our exposure but at the same time make our own sales and cash flow as healthy as possible and as we all know, it’s a fine balancing act which many don’t manage easily or some, at all.

We all have in our business manager minds, the scenario playing out if one or more of our customers went under and how it would affect us, both in terms of loss of sales and bad debt. We naturally apply this thought process throughout all of our sales ledgers and even if things are going really well, we still plan out in our minds, the ‘what ifs’ for those nightmare scenarios, so as to limit the damage to our own businesses if that fateful day surfaced and by playing out the ‘what ifs’ we help prevent being caught with our pants down so to speak.

Yet when it comes to the Eurozone Bailouts there doesn’t seem to be a Plan B? No one is providing any other solutions or ideas beyond the ‘too big to fail, continue the bailouts’ mantra yet, and I tell you one thing, it scares the bejesus out of me.

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