Italian financial bailouts in 2012 – Simply explained

With 2011 out the door and 2012 looming ahead, the financial world is left nursing a bruised ego for what was, this time last year, supposed to be a positive year of debt control. Bailouts were supposed to lead to financial recovery and healthier economies. However, we’ve all learned that the Eurozone is not going to become debt free without a few more empire-sized falls.

The irony of these debt-stricken nations in the Eurozone is that the entire Eurozone, as a whole, has more than enough money to dig out debt stricken countries and redistribute wealth. The trick is doing so in a way that no nation is left significantly worse off for doing so. Is this possible? Certainly…

Consider this now famous example doing the rounds online:

It is a slow day in a damp little Italian town. The rain is beating down harshly, and all the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit.

…On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the Italian hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some room-keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay off his debt to the butcher.

The butcher takes the €100 note and rushes down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay off hid debt at the supplier of animal feed and fuel.

The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the friendly neighbourhood pub. The pub owner slips the money along to the local prostitute drinking at the bar – who, in spite of facing hard times, has always gladly offered him her ‘services’ on credit.

The hooker then rushes over to the hotel and pays off her room bill to the hotel owner with the €100 note.

The hotel proprietor quietly replaces the €100 note back on the counter, so that the rich traveller will not suspect anything.

At that moment the traveller comes down the stairs, states that none of the rooms are satisfactory, picks up the €100 note, pockets it and leaves town.

No one has produced anything.

No one has earned anything.

However, the whole town is now out of debt and looking to the future with a lot more optimism.

And that, ladies and gentlemen, is how  financial bailouts work.


Italy in dire straits

The new Italian prime minister used his end of year press conference to warn that indebted countries will be “in difficulty” unless the European Financial Stability Facility (EFSF) is boosted with “significantly greater” firepower.

Italy raised €7bn (£5.9bn) in the first big test of the bond markets since the ECB (European Central Bank) opened its doors with €489bn of cheap loans in an attempt to inject liquidity into Europe’s arid banking system. Rome paid 5.62pc to sell €2.5bn three-year debt – a much lower yield compared to the record high of 7.89pc paid a month ago. It paid 6.98pc to shift its 10-year bonds, compared with 7.56pc in November.

Read more: Italy Seeks to Boost Bailout Fund | Telegraph.co.uk

With the above story in mind, the Italian situation can be simplified for the non-economist by comparing the EFSF and European Central Bank to the  German tourist who handed over the €100 note. When lent at little to no interest, Italy has a chance to pay off huge sums of debt very quickly, which will allow a chain reaction of debt pay-offs to occur around Europe.

A lot of that money will quickly find its way back into Italy as other nations pay off debts owed to Italy. Monetary injections received, go directly into strengthening its own economy, producing jobs, thereby producing more money. Italy then is in a position to pay off the remaining loan back to the ECB.

While not occurring within minutes like the hotel owner story, and while not nearly as simple, the effect is still the same: many nations are de-leveraged by money that goes right back to the place that lent in the first place.

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Categories: Business, Politics, Law

Author:Andrew Beato

CEO, Chief Editor and founder of Intentious. Passionate comment enthusiast, amateur philosopher, Quora contributor, audiobook and general knowledge addict.

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