Thursday, May 13, 2010

The European Bailout Explained

James Hamilton (Econbrowser) has an excellent post on the trillion dollar rescue package.


“ … as was the case in the 2008 difficulties, one can either view (the Greek predicament) primarily as a liquidity problem, for which we simply need the central banks to step in boldly to arrest the jitters, or as a solvency problem, in which case the policy decision is how to allocate the unavoidable capital losses among bank owners, bank creditors, and the government so as to minimize collateral damage to innocent bystanders. The fundamentals facing Greece suggest there is an overwhelming solvency component to the current problems. And the policy response so far seems to be choosing to allocate 100% of losses to the European and U.S. taxpayers."

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