Europe TARP'd itself

The Real Euro Crisis - The EU's bailout postpones the day of fiscal reckoning.

Excerpt:

A trillion dollars is a lot of money, even these days, and the European Union has demonstrated that a check for €750 billion ($972 billion) can produce a rally in European debt markets and global equities. Too bad the larger price for Sunday night's "shock and awe" intervention is likely to be paid in the further erosion of Europe's fiscal and monetary credibility.

French Finance Minister Christine Lagarde noted Monday's exuberant market reaction with satisfaction, saying that the "message had gotten through" that Euroland would defend its currency. Yes, creditors no doubt love that governments have guaranteed their high-yield loans to Greece, Portugal, Spain and any other profligate government that comes under bond-market siege. What investor doesn't like a risk-free loan that pays 9%?

But there is no such thing as a free sovereign bailout, and the EU's intervention merely transfers those risks from banks and other creditors to taxpayers and the European Central Bank. The real gamble is being made by politicians who are calculating that, by taking the risk of sovereign default off the table for now, they are giving the global economic recovery time to build and making it easier to address Europe's fiscal woes.

In a sense, Europe has decided to TARP itself. German taxpayers have undertaken to underwrite the spending of Southern European governments, with Greece playing AIG, and Portugal starring as Citigroup. Spain, we suppose, is Goldman Sachs. Perhaps it will all work. But our guess is that Germany and France will have a harder time shedding responsibility for the fiscal policies of entire nations than the U.S. Treasury has had selling shares in bailed-out banks.

There is also the small matter of the rule of law. Such bailouts are expressly prohibited by the 1992 Maastricht treaty, and that promise is now in tatters. In the euro's first serious test, the political class blinked. The resulting moral hazard will haunt the single currency for years and reduce the incentive for governments to keep their fiscal houses in order.

Comment: One senses a coming fiscal collapse! A Biblical perspective ... "fat cows .... thin cows" (Genesis 41)