The EU's Circularity Problem

Into the blue again, after the money's gone
Once in a lifetime, water flowing underground
--Talking Heads

Kyle Bass thinks that the EU is engaged in a game of chicken with Greece right now. Greece is broke and running deficits, and they are certain to default. A nice point here that countries that commit more to bailout facilities jeopardize their own sovereign debt ratings, since they are now on the hook for more liabilities.

Bass concludes that the math simply doesn't work. Even Germany is a debtor nation. No matter how one looks at the magical faclities being erected to contain/bailout EU members, the bottom line is the 'solution' being offered is adding more debt to a sovereign debt problem. More leverage.

KB suspects that many people have yet to think the circular nature of this plan thru.

I think he's right. Right now, markets seem relieved that 'something' is being done. Once the euphoria lifts, however, they will likely see the same old problem staring at them.

What solves a debt crisis? Paying the debt down or restructuring (a.k.a. default). Either way, standard of living will go down.

What brings this 'solution' about faster? Germany decides not to participate. Bass thinks this to be likely, based on his firm's analysis, which includes on-the-ground polling of influential Germans.

no positions