June 16, 2010
The Washington Post had a front page article on how delay has raised the cost of the Greek bailout effort. The article told readers:
“the cost of helping Greece avoid default increased about fourfold, to $140 billion from roughly $35 billion at the start of the year. Confidence in the European economy was so badly battered that European leaders together with the IMF had to pledge another nearly $1 trillion to reassure investors.”
While the point about the cost of delay is well-taken (it would have been easier to reassure markets with a strong commitment early by the European Central Bank and the IMF), the measure of costs is very misleading. The $1 trillion figure is a measure of loans and guarantees, not actual outlays. During the U.S. financial crisis, the Fed and Treasury extended more than $10 trillion worth of loans and guarantees by some measures. The overwhelming majority of this money involved guarantees that were never actually needed or loans that were repaid in full. This is likely to be the case with the European commitments as well.
It is important to make the distinction between this sort of confidence building effort and actual money out the door. The Washington Post and other news outlets were able to make this distiniction quite effectively with the U.S. bailout (in fact, they have misleading reported that the government has made money on these bailouts). Presumably they can apply the same analytic skills to their discussion of Europe’s bailout.
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