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Tuesday, 27 December 2011

Would the US print dollars for a third Greek bail-out?

The US Fed may well be forced into underwriting a third Greek bail-out.  A Greek sovereign default may well be more seriously harmful to the US economy than to Europe or Greece, because
of inordinately large and imprudent exposure by US financial insurers to Greek default.  It is possible some US financial institutions may have taken on more insurance and credit default swap (CDS) obligations than they are able to meet, earning lucrative premium income by taking a "sure bet" that Greece would never default.

The second Greek bail-out appears not to have been agreed upon, with Greek bond holders still negotiating their "haircut", and threatening legal action.  Although the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Financial Stability Facility (EFSF) have agreed upon a new plan to resolve the European financial crisis, the new plan remains only that:  another new plan.  This newest plan can only be implemented if every nation not only agrees, but actually implements what they have agreed.  Most European nations have ignored past fiscal agreements.  There is no guarantee that the newest plan will be implemented;  and if it is, it can't be soon.

Neither Greece, nor Europe as a whole, appear as determined to prevent Greek default as is the US.

Therefore if the second Greek bail-out unravels, it would be in US national interests to prevent Greek sovereign default one way or another, including possible direct support.  The US might thus have got itself into a situation where quantitative easing is required, not for domestic economic stimulation, but for preservation of large imprudent financial institutions.  This scenario would be negative for the US dollar and inflationary in the longer term.  But this is only one of many possible outcomes of these highly volatile crises.

Also see:  "Is Germany being covertly pressured?";  "Euro survival rests on too many dilemmas";  "G20 bestows "too big to fail" honour upon twenty-nine banks".

I acknowledge Ellis Martin's interview with Jim Sinclair.

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