UBS report: what if Euro cracks up?

[Brian Ellis]

I get the impression that may think that "bail-out" means a gift of cash. It means nothing of the sort. It is a loan that has to be paid back, usually with interest. The major difference between a bail-out and a straight loan is that the collateral is weak, usually devalued bonds. There is therefore some risk, although the long-term risks are low.

Some examples of bail-outs are those given to US banks and auto-makers and the BNS to the UBS in Switzerland. Most of these have already been paid back, at least partially.

It is therefore wrong to say that it is the taxpayer who loses. While the bail-out is outstanding, the devalued bonds are still classed as assets in the country's balance sheet at the cost, the same as reserves. As soon as they are repaid, the taxpayer benefits not only from the repayment in full but also the interest. The advantage is that the agreed interest is much lower (~2-4%) than the same bonds would draw in a commercial market (15-18%). Provided that the bailer has sufficient reserves to offer the bailee, the taxpayer is he who benefits the most in the medium to long term, as has already been demonstrated in the repaid bank bail-outs.

[Umfriend]

I note that in the cases that I know of (some US and Dutch), the government/treasury has demanded higher returns then what would have been regarded as normal prior to the credit crisis. AFAIK, all such bail-outs are maing the treasury money.

On the other hand, while it is not a gift of cash, as it is a loan at better terms than available at that time, there is indeed a gift, or value transfer (or, and this is interesting, creation).