The newest German plan to bail out Europe likely won’t work. If it even exists.

June 19, 2012

Everybody stop moving around! (Credit: Markus Schreiber/AP)

Is Germany going to rescue Europe? Here comes the Guardian with a report that German Chancellor Angela Merkel may agree to bail out Spain and Italy after all:

Angela Merkel is poised to allow the eurozone's €750bn (£605bn) bailout fund to buy up the bonds of crisis-hit governments in a desperate effort to drive down borrowing costs for Spain and Italy and prevent the single currency from imploding.

Germany has long opposed allowing the eurozone's rescue fund, the European Financial Stability Facility, to lend directly to troubled eurozone countries, fearing that Berlin would end up paying the bill, and the beneficiaries would escape the strict conditions imposed on Greece, Portugal and Ireland.

Let's translate this into plain English. Right now, investors are getting leery of lending Spain and Italy more money (which both countries need). Spain, you'll recall, has been racking up an enormous amount of debt during the downturn, not least to prop up its troubled banking sector. So, if the Guardian's correct, the rest of Europe is going to use its $950 billion "bailout fund"--the European Financial Stability Facility--to loan money to Spain and Italy directly. Since the EFSF is largely financed by rich European countries like Germany and France, this is essentially a bailout.

But is this rumor true? And is the idea workable? Tyler Durden over at Zero Hedge raises some critical questions. For starters, the newest version of the bailout fund (the European Stability Mechanism) doesn't even exist yet. And unlike the European Central Bank, which technically has unlimited resources because it can print money (it just doesn't want to print euros to bail out Italy and Spain), the European bailout fund, by contrast, has finite resources. Very finite resources.

The bailout fund is on the right, in gray--and that's assuming it actually gets finalized and gets an extra $189 billion from the IMF. Moreover, much of the European bailout fund has already been committed to propping up Greece, Portugal, and Ireland. There's not much money left to help out Italy and Spain, two much bigger economies that need to borrow an enormous amount of money to stay afloat. At best, it could loan Spain and Italy some money and hope that that calmed down the bond markets, giving the euro zone some more time to fix its structural problems. (Yes, that last clause is a huge "if.")

Long story short: Even if the Guardian's reporting is correct, this doesn't look like the last bailout the euro zone will ever need.

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Brad Plumer | June 19, 2012