It's only natural for some Americans to look at Greece's fiscal woes and say, "Too bad for Greece and Europe, and their citizens."
In reality, what Americans should be saying is, "Too bad for us!"
The European Union and the International Monetary Fund are co-funding an aid package that will assist Greece's transition to fiscal solvency. In other words, the IMF will be part of the effort to bail out Greece. But who will bail out the IMF if -- or when -- it runs out of money?
You guessed it: The world's largest economy, the U.S., is at the top of the list.
The IMF May Run Out Of Money -- Soon
A year ago, the world's major economies increased the IMF's intervention and stabilization resources to about $750 billion as part of an agreement reached to better equip the organization to deal with larger and more-complex crises in the globalization era, BBCNews reported.
Greece's bailout alone is likely to cost 120 billion euros ($159 billion) over three years, German Green Party lawmaker Juergen Trittin told Bloomberg News Wednesday, after being briefed by IMF Managing Director Dominique Stauss-Kahn. The IMF can handle bailing out Greece, as well as a potential stabilization plan for Portugal (budget deficit 9.4% of GDP), if the debt contagion moves West. The actual bailout tab could, of course, turn out to be a lot more.
The IMF wouldn't have enough funds on hand, say, to stabilize Spain (budget deficit 11.2% of GDP), which has an economy four times larger than that of Greece, if Spain determined that it required help at the same time as Ireland needed funds.
A Rerun Movie
Rep. Mark Kirk (R-Ill.), who worked at the World Bank during the 1982 Mexico debt crisis and who sits on the House Appropriations Committee, which oversees IMF funds, said a convergence of debt crises in Spain, Portugal, Greece and Ireland would represent the worst of times for the IMF.
"We have seen this movie before," Kirk said, The New York Times reported Wednesday. "Spain is five times as big as Greece -- that would mean a package of 500 billion [euros, or $662 billion]." Kirk added that he had already asked for committee hearings on the IMF's ability to handle a European collapse.
That $662 billion would come on top of Greece's roughly $159 billion (and counting) aid package: Add in assistance for Portugal, and possibly Ireland, and what arises is a scenario that would reduce IMF balances to dangerously low levels, if not exhaust them entirely.
The IMF's Greek/European stabilization effort, of course, will be assisted by the EU, and as DailyFinance's Peter Cohan pointed out, an EU version of TARP in the form of an $800 billion or so fund may be coming. The problem is, the EU's largest economy and probable biggest contributor to such a program would be Germany, which has expressed reluctance over bailing out Greece, let alone participating in an enormous, continent-wide stabilization effort.
Don't Count on China
Moreover, any EU stonewalling would amp up pressure on the IMF, which would likely turn to its key members for additional funds: the U.S. (which has 16.7% of the votes in the IMF), Japan (6%), Germany (5.9%), the U.K. (4.85%), France (4.85%), and China (3.7%).
Further, while a new IMF request to replenish a depleted intervention/stabilization account would offer an opportunity for emerging power China to step up, gain clout in the organization and demonstrate its new, world-class status, don't look for it to rush in with funds. More than likely, if asked to contribute, China would argue that the European debt crisis originated in the developed world, and that the developed world should foot most of the bill to fix it.
And that will place the ball squarely back in the U.S.'s court: This nation will have to provide a large share of the funds to replenish the IMF. Leaving it essentially broke won't be viewed as a credible option in a world in which new debt crises seemingly arise every few months. Given that ongoing threat, plus the added risks of contagion, banker-to-banker mistrust and the related zaniness that nearly froze global credit markets during the financial crisis of 2008, an IMF in good working order is a necessity, even if it becomes an expensive one.
The map may show Greece, Spain and the rest of the eurozone as thousands of miles away from the U.S., but in the interconnected and interdependent world of global finance, they're just across the street.
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