Cyprus bailout next?

[Dr Mordrid]

One wonders how long the German people are going to tolerate their status as perpetual donor.

[UtwigMU]

They are not donors yet and it's not so clear-cut.

Bailout means that each Euro nation (based on % of GDP) lends money at low interest to nation asking for help. For example in Slovenia we lent 400 millions (200EUR/250USD per capita) of EUR to Greece in first installment in 2010.

We are also not bailing out nations per se but banks which lent money to nations or banks in nations. While some nations such as Spain are not as much in debt and didn't have as much deficit, there was a huge real-estate crash and there is high unemployment. This meant that Spanish banks were under capitalized and state had to take on their debt.

Also once state asks for help, there are conditions attached (cutting public jobs, reducing social spending, balancing budget, liberalizing some sectors...)

Or as it happened in Greece:
When EU started, French and German banks could borrow money at low (3% interest) and lend it to Greece at 8% interest. Since Greece is net importer, this money then flew out of Greece to German exporters. While Germany is lending money to others and doesn't have as much control as they did with DEM, they are also benefiting from huge EU market. For example some German industrialists (BMW) are in favour of bailouts and against austerity.

When Greece was bailed out this money immediately went to German and French banks. and debt to banks was exchanged for debt to EU members, ECB, IMF. Then once Greece bankrupted the bonds were exchanged for less and some debt was written off.

Basically entire EU* tax payers bailed out German and French banks. Except for Slovakia, they have liberal (what in USA can be compared to libertarian) government and they said that Slovakian pensioners who receive 360 EUR on average will not bail out Greeks whose pensioners receive 1300 EUR.

If Euro survives and Europe is strenghtened, Euro will strenghten it's status of reserve currencies and having a reserve currency is huge benefit. For example alredy can Germans borrow money at negative interest since they are a safety haven now.

Question is how all this will unfold. While Euro was formed there were generally boom times and while there were Maastricht rules (3% of GDP, 60% debt, within 2% inflation/interest rate of EUR area). No one was enforcing those rules and everyone including Germany broke them even before the crysis.

Now there is a fiscal pact planned which will require constitutional changes by member states which dictates 0 deficit. Also talked about are Euro bonds (national bonds would be exchanged for EU bonds) but in this case there will be more political union.

While some (such as UK - in EU but not in Euro) are sceptic, there are quite a few countries who like EU (Poland - not in Euro, had practically no recession) or Estonia and Slovakia (both in Euro, their economy is doing well).

In 2013 there are elections in Germany and Merkel could be voted out or will have to form coalition with socialists. Since EU institutions (commission = quasi government, president) are impotent (for now), Merkel has stepped in to fill the void and she has been doing moderately OK job at this (concerning the mess we're in). What happens if she goes is anyone's guess.

Here is video of Angela Merkel's reaction to German team scoring a a goal against Greece on Euro football cup.

http://www.youtube.com/watch?v=VKJey41fDOw

[Brian Ellis]

The conditions of the loan to Cyprus are still being negotiated. I know which public-funded fat cats who are draining the economy I would target! I speculate the loan at €5bn or thereabouts.

Something has got to change in the eurozone. The current situation is untenable and die Führerin will have to put some water in her wine. She is going further out on a limb (sorry for mixing my metaphors). The only long-term solution is a higher degree of federalism and controls, to make it a real money controlled by the ECB. This will involve pooling each country's monetary assets, reserves and debts and converting the latter into eurobonds. At the same time, it will be necessary to establish a federal fiscal police to stamp out fraud, money laundering and corruption within the eurozone. Not every country will welcome this (and not just the southern ones!). My hope is that the eurozone will not force all EU members to join. The zone could do better without the monetary mic-mac of the UK and some other current non-members.

[Umfriend]

I do not think eurobonds are a good idea. I would favor countries with failing fiscal policies to, at least temporarily, relinquisishing fiscal and economic policy and introduce reforms that make it easier to exit the Euro.

[dZeus]

I do not think eurobonds are a good idea. I would favor countries with failing fiscal policies to, at least temporarily, relinquisishing fiscal and economic policy and introduce reforms that make it easier to exit the Euro.

Don't you think it's more likely that with sufficient countries under fiscal pressure, a pact will be formed pushing the ECB for more monetary easing? In the end, Germany might quit before anyone else does...

[UtwigMU]

I also think this is the case.

Merkel said today that as long as she lives there won't be Eurobonds. (Why should German be forced to borrow money at higher rate because of others and lax rules on borrowing).

Once further countries fold, banks and governments who lent them money will fold in a domino effect. The two solutions left are printing money and dissolution of monetary union.

Just recently our financial minister said that Slovenia will not have to ask for EU financial help. I'm afraid this translates into "We will need help soon" as was the case with Greece, Ireland and Spain.

A rather prophetic speech by Margaret Thatcher from 1990 on what will happen with Euro:

http://www.youtube.com/watch?v=vZZf7cLhPG8

[Umfriend]

Yeah, same difference though as a number of countries would then join Germany in a new currency. There actually is a different option and one that should have been chosen from the start: default and reorganise much as the Paris Club has done in the past.