The EU denied rumors that it would give Spain an aid package of $307 billion along with the IMF and US. Spain’s borrowing costs are moving toward those that Greece had to pay before its bailout. There are reasonable concerns about the availability of capital to run Spanish banks which could cause a breakdown of the liquidity system that is feeds financial firms there.
Greece showed how bad a crisis of confidence can be. The capital markets lose faith and eventually the interest rates a nation must pay are so high that they cannot even handle the debt service.
Several members of Congress say they are concerned about the estimated $100 billion cost to the US from participation in the IMF’s rescue of the weak Eurozone nations. Their logic is that the US contribution to the IMF is large enough to put tens of billions of dollars of American capital at risk. Since the loans are likely to be paid back, at least as the economy of the Eurozone stands now, the fears are overblown.It is inconceivable that the US would offer any direct aid to any nation in Europe. Congress is concerned enough about the U.S. deficit that has cut funding for the new unemployment benefit package. If the US will not help its own citizens, there is no chance it would help any country with faltering finances
Nonetheless, the US does offer aide to many countries around the world whether that is through military means or support for nations that hold strategic interest for America. Europe’s fate is about to become a strategic interest. A deep recession there, defaults on sovereign or bank debt, and exposure US banks have in the region could all severely damage the American economy and the balance sheets of some of the largest financial firms headquartered inside its borders. Aid to Europe may become a necessity rather than a choice.
Congress is reluctant to invest further in the economic health of the US much beyond the $787 billion aid package passed more than a year ago. Perhaps that is because there is little evidence that it worked or because the mid-term elections may be largely determined by the public’s view of federal deficit spending.
A collapse of Europe’s economy becomes more likely as each day passes. A US-lead salvation of the region may be the only way to prevent another sharp slowing of the American economy. Congress may have another hard expenditure decision to make before the end of the year.
Douglas A. McIntyre