In case any of you have just returned from a two-week vacation on another planet, there are very serious economic troubles in Greece that have already begun to threaten other larger EU nations. The European monetary system is very interwoven. Major banks in various EU nations are holding debt from many other major banks and sovereign EU nations. Stock markets in the US are noticing and are acting scared. The situation has been likened to the game “Domino Rally”

Remember, Greece’s economy is relatively tiny. But Greece owes money to other EU nations, and their banks are already in trouble, so Greek debt going south could start a chain reaction:

(larger picture at link above)

It’s been estimated that several trillion dollars will ultimately be needed to bail out Europe and stop a cascading economic collapse, one that could conceivably take the UK and the U.S. with it. [Not shown on the above chart is European bank indebtedness to US banks, which I have discussed earlier].

Zerohedge has an excellent piece on European debt this morning (props to Tyler and Cheeky). The charts show debt-to-GDP ratios and, even more frightening, the amounts of debt that have to be rolled by these sovereign nations over the next few years. Remember, borrowing money is cheap if you borrow short-term. Interest costs are thus held down. But that short term debt comes due and has to be paid off and be reissued very very often; this is Roll Risk. You can see that the troubled EU states (just like the United States), have gone short-term, exposing themselves to massive roll risk.

So where will the money come from? Care to take a guess?

The Wall Street Journal has reported that
“The Fed is considering whether to reopen a lending program put in place during the financial crisis in which it shipped dollars overseas through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England. The central banks, in turn, lent the dollars out to banks in their home countries in need of dollar funding. It was aimed at preventing further financial contagion.”

Of course, we should not worry, because
“Fed officials see the swaps as a low-risk program, because its counterparties in these loans are foreign central banks, and not private banks. At a crescendo in the crisis in December 2008, the Fed had shipped $583 billion overseas in the form of these swaps.”

Does the Fed have extra money lying around waiting to be lent out, or are they going to print up some more? So the Fed lends [new] money to foreign central banks, and then the foreign central banks lend it to their own banks, banks which are in the same sad shape as our own, and it’s low risk? I guess they mean that since foreign central banks have printing presses, just like uncle Ben Bernanke, we’re pretty much guaranteed to get our money back, such as it is. Once they print up a cool $Trillion or so more will it buy anything by then? Who knows? What IS certain is that the banks will be saved, regardless of whatever else might befall the average citizen.

Recognition of the U.S. hand in the bailout of Europe is accelerating. Another piece linked on Zerohedge this morning (props to GW):
There is talk of the ECB providing some kind of one year repo facility (where government bonds are swapped for 12-month loans) in collaboration with the US Federal Reserve.

I don’t want to loan money to Spanish and Portuguese banks, do you? Did they ask us? Do we have a choice?

The European Union is expected to take the lead in their own bailout. Many pundits expect an announcement Sunday, which means there may already have been one by the time you read this. Numbers being thrown around are between $600 Billion and $1 Trillion or so, but don’t expect these to be made officially public. This will be the beginning of Europe’s TARP program, and citizens there won’t like it, either.

Austerity for the middle class, wherever we might live. Free money for the banks [YOUR money], wherever they might be. I guarantee it.

I almost hate to say it, but I am starting to believe that the federal system is hopelessly corrupt. There are just so many things wrong. We must try, but if we cannot reform Congress, if we cannot audit the Fed, then we should probably concentrate on building a lifeboat for Virginia. I hope we’re not too late.

Edit again, 9 May @1530: Britain rejects Eurozone bailout fund
European Union finance ministers meeting to consider ways to prevent the Greek debt crisis from spreading across Europe have hit a roadblock, with Britain announcing they will refuse to underwrite a bailout fund worth some $60 billion.

EU leaders are worried that financial markets will continue to lack confidence in countries with high deficits.

Officials and diplomats in Brussels hope that a stabilisation mechanism will calm the international markets’ fears about default in Europe.

But the loan guarantees are too much for the UK to swallow, and the UK Treasury will have nothing to do with them. Without the UK onboard the package looks pretty thin.

Also, Angela Merkel has faced a severe election challenge in Germany, and hers was critical support for bailing out Greece. The German delegate to the conference working on the bailouts was taken to the hospital with a severe allergic reaction and had to be replaced.

You can’t make this stuff up.

Edit still again, 5/9/10 10:20pm
For release at 9:15 p.m. EDT
In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.
EU Crafts $962 Billion Show of Force to Halt Crisis (Update2)
By James G. Neuger and Meera Louis

May 10 (Bloomberg) — European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.

Edit 5/10/10 8:00 am: The Fed’s partially funding this bailout through its swap lines can be seen as global bankers aiding global bankers in controlling nations. What do we call that?