PIIGS Saved from Slaughter

Soon "bail-out" will be as common in Europe as "Big Mac and fries..."

WE'RE NOT SURE what to make of it, writes Bill Bonner in his Daily Reckoning from snowy Bethesda, Maryland.

Does the latest bounce in the Dow mean we were wrong about the beginning of the end? Are we still in the middle? Or is our whole theory wrong?

Hold your horses, dear reader. We'll have to wait to find out.

The papers attributed the big upward thrust in share prices to news from Europe. The specific fact that caused the swing to profit had to do with Jean-Claude Trichet's travel plans. He was in Australia for one meeting; now he's coming back to Europe early so he can partake of another.

What has caused him to call his travel agent is a problem centered in Greece. The Greeks are in a jam. They spent too much money in the bubble years. Then, they saw their tax revenues disappear in the bust.

Sound familiar? It should, because the same could be said of most of the US states…and most of the world's countries, emerging markets excepted. They all spend too much. Almost all run deficits. And almost all their deficits are getting bigger and bigger.

So far, the big economies don't have a problem. Lenders think they are good for the money. Almost miraculously...or supernaturally...the USA – the world's biggest borrower – is able to obtain financing for 10 years at less than 4% interest. Since the official inflation rate is 2.7%, that means lenders give up their money for a real rate of return of just a little over 1%.

It's the little economies that have trouble. They don't have printing presses of their own. Like California or New York, ultimately, they have to balance their budgets. They can't inflate their way out of trouble. So, when their backs are to the wall they either get tough and cut expenses rudely. Or they go broke...default...and then have the cuts forced upon them.

The focus of this week's discussion is the PIIGS – Portugal, Ireland, Italy, Greece and Spain. Together they've got about $2 trillion worth of debt. And lenders are making it more expensive for them to borrow more. If this continues, they'll default. And then, say the financial authorities, terrible calamities will happen. The whole European financial system could come falling down. It would be the end of the world as we have known it.

Does this sound familiar too? It should. It's the same scare tactic used after Lehman was allowed to go under. AIG had to be saved. And Fannie and Freddie. And GM.

Now, that lame argument is probably going to lead to the bailout of Greece...and by extension, all the other insolvent nations along the periphery of Europe. The debts will be collectivized...just like those of Fannie and Freddie. Instead of being allowed to fail on their own merits, in other words, European nations are locking arms...they are all going to fail together!

Germany's politicians are already talking about a program of support in a "broad sense" for Greece and other problem economies. Soon, in Europe, the English word 'bailout' will be as common as "hamburger" or "coke.

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