Economists and investment banks are starting to put some concrete numbers on the Greek—and Spanish and Portuguese—debt crisis. And they’re large. To me shockingly large.
Kenneth Rogoff, a former economist for the IMF (International Monetary Fund) turned Harvard University economics professor—and whose book, This Time Is Different, co-authored with University of Maryland economist Carmen Reinhart, is a great source on the consequences of runaway national debt that I’ve used repeatedly on JubakPicks.com—told the New York Times that the IMF alone would need to commit $200 billion to bailing out Greece, Spain, and Portugal.
So far the IMF has pledged $15 billion to the initial $60 billion IMF/European Union bailout plan for Greece. That’s likely to get kicked up to $25 billion as a result of current talks with European Union governments.
But unfortunately that $200 billion is only a partial bill, just the cost to the IMF, for this crisis.
Goldman Sachs says that Greece alone will need a total of $200 billion from all parties over the next three years.
Barclay’s Capital economist Piero Ghezzi told the Times he puts the numbers at $120 billion for Greece, $53 billion for Portugal, and (ready?) $460 billion for Spain.
Think German taxpayers are angry now? Just wait until they figure out that the billions that they’re being asked to pony up to bail out Greece in the current $60 billion plan is just a down payment.
As far as the financial markets are concerned, it doesn’t really matter whether these estimates of the cost of a bailout are right. The markets are looking at these numbers, taking them with a grain or three or salt, and then asking the big question: Does the European Union have the will to end this crisis even if total costs are only 50% (or 40% or 30%) of these projections? Even 30% of the Barclays estimate is more than $200 billion–more than 3 times the size of the proposed Greek bailout plan.
 I don’t think the European Union governments are going to be able to take the popular anger and put together bailout packages of this dimension. The European Union is going to have to swallow its collective pride and let the IMF lead the package and take the heat. It’s what everybody does because it gives governments political cover so they can make the hard decisions. Eventually the European Union is going to have to agree to let the IMF run the bailout show.
The real danger now is that European Union governments will debate that step for so long that the financial markets will simply stop lending to Greece, Portugal, and Spain in a vote of no confidence in the politics of Europe.
Jim – I’m so glad that Goldman Sachs – the firm that aided Greece in accounting fraud to hide the extent of its debt – can now give us such clarity about the amount of the needed bailout – gee aren’t they just wonderful?
Shameus – right on! bobisgreen – the US can, and will, do one thing that even the EU cannot — just print more money (as long as China goes along.)
All this fretting and furor over an intangible asset…
Pity the countries that have to take IMF money. The loans might solve short term problems, but takers will sell their soul in the long run. The follow-on scenario is – break the unions, privatize all businesses so US corporations can snap them up. Leaving the countries poorer for it.
Shameus,
The problem is: 1. The current admin is raising taxes, increasing spending and paying back $0, nadda, zilch in debt. 2. Surplus? not in this climate! If so, pay off debt (sorry I come from old school…been around, seen a lot) Analyze for a moment that so little of “stimuli” is going anywhere but govt jobs…not private sector to encourage hiring.
One could argue politics all day. The cold, hard, painful truth is that out of control debt and unwise spending will wreck personal, corporate and govt finances! It’s common sense, history bears it out and is being played upon the world stage for all to see.
freddywalky,
Don’t know about the end of the world,but do employ any and every tool and trick to make $ in this environment…I agree with you. Some are more talented than others employing puts and calls, etc. I’m having fun, making a little even in this economy. Good luck for continued success to all.
That’s it. Talk of the end of the world is back in force. Quick question though: do any of you ever protect their stock positions with put options??? Apparently because if you were you wouldn’t be too afraid. And what about generating a little income at the same time with the sale of calls while you’re at it if your stocks don’t do too much. Of course it’s a little more complicated than that but there’s a lot more to investing than buying-holding-selling… Protect your positions with Puts first to limit your losses as an insurance. Then, you can apply different income strategies and investing becomes more fun. You guys should try it some times.
Bobisgreen,
while in the long run you’re right that running up massive amounts of debt is dangerous, and no one is exempt; the other sides of that coin– cutting spending and raising taxes in a time of recession–is also devastating for an economy and seriously hurts long term GDP. The trick is spending now to grow the economy so that it can manage and pay back the debt when the good times return. The problem is that as soon as we run a surplus we call for trillions of dollars in tax cuts, rather than paying down debt in preparation for the down turn. I pity the current administration which has to walk this tightrope of needing to spend stimulus money to get the economy going so businesses can get capital and millions can get back work, and trying to avoid destabilizing the currency or country with massive debt. Part of the solution will be to raise taxes in the future.
Say a government, any government, is $1 in debt. And then you raise taxes and generate $1 in revenue. Will the politicians use that $1 to pay off the debt or simply spent it as fast as possible?
Any bail out is a complete waste of money that could be spent on something better. Or not taken from the taxpayers in the first place. Eventually countries, and the people that live in them, are going to have to accept responsibility for their actions. Otherwise, the eventual collapse will hurt even more.
sliman,
I bought some more GLD yesterday. I’m thinking of buying more if it dips again.
Jim,
I’m sure you’re tired (and sick) of saying what everyone knows is true in your posts; out-of-control spending, corruption and a huge national debt is a formula for failure (US govt. hint hint). It doesn’t look like Washington or anyone else, especially in Europe, is listening or watching. If you or I conducted our personal finances in such an iresponsible manner, we would be hung out to dry…in prison!
I think there will be some natural ebb and flow of (bad?) news that will allow the euro to come up for air from time to time. those are the times to assess your pain level… But the euro is looking to move ‘two steps up, three steps down’ for a while, I believe.
Are you buying more GDX or GLD?
cpressley…
I have some NMM but will hang on until I hear differently from Jim! 🙂 Already bounced back some since this morning!
I wonder if these estimates include derivative exposure? Not sure how it could since they’re not on exchanges.
Europe is one huge “SELL SELL SELL!!!”
Look at it this way: What do you think this will do to the economies of countries like Germany? If they bail out the PIIGS, then THEY will be stuck with a huge debt load. Then we’ll be at round 2 of this mess, where S&P starts downgrading German debt.
FYI: I’ve shut off all my buy orders with the downgrade in Spain by S&P. Things are about to get really ugly folks.
A bit concerned about having a position in NMM with this drama unfolding, as evidenced by today’s plunge of (currently) 6%. Thoughts?