The second post ever posted on this blog in October 2008 is entitled, "International bailout arms race." I characterized the flush of bailout commitments that we saw across almost every major developed country as a strategic optimal response in the face of the bailout plans of the United States. With this model in mind, I predicted that the bailouts would develop into a situation similar to the nuclear arms race of the 1980s in which the U.S. defeated Russia by outspending them on weapons. The same thing is happening now as predicted among developed countries with respect to bailouts. The list of countries hitting their spending capacity and "folding their hand" started with Iceland and Hungary, and now looks to include Spain, Greece, Ireland, Germany, the U.K., Belgium, and the E.U. as a whole (see Iceland/Ireland joke).
Forbes.com ran a story last Friday noting that Greece, Spain, and Ireland were getting closer to their borrowing (and therefore, spending) limits. The evidence of this is that the spreads on the government debt from those countries have increased significantly in the last week.
The Wall Street Journal reported yesterday and today that the U.K. and the entire Euro area were approaching their spending limits as well. From the story yesterday, the value of the pound fell nearly 5% on Tuesday after the announcement of the U.K.'s big bank bailout on Monday. The article reads,
"European Union finance ministers warned that they are running out of room to spend money to boost their economies, as Germany predicted its economy would shrink at least 2% this year and Hungary's currency fell to a record low despite recent efforts to prop it up."
Today's Wall Street journal also reported that Belgian bank shares are falling and that Belgium may have to administer bailouts on a large scale to its banking industry.
One of the great ironies of this global financial crisis, which we commented on back in October (post 1 and post 2), is that dollar denominated assets have become the "safe haven" in a global recession that was caused by the U.S. Bank stocks in the United States have also been plunging because of the fear of inefficient government control, but the U.S. can still borrow at very low rates in the international market. We seem to be winning this "international bailout arms race," although I suspect the victory will come at a cost in the long-run of both good-will and international openness.
(Thanks to Wills Hickman for research assistance on this topic.)
UPDATE: Ian Bremmer and Nouriel Roubini added today (1/23/09) on the Wall Street Journal opinion page to the list of countries likely to fall in the international bailout arms race. They include Romania, Bulgaria, Argentina, Venezuela, Ecuador, Mexico, Pakistan, Indonesia, South Korea, Russia, and Ukraine. Bremmer and Roubini actually used an arms race term to describe the economic situation: "mutually assured economic destruction."
The Wall Street Journal reported yesterday and today that the U.K. and the entire Euro area were approaching their spending limits as well. From the story yesterday, the value of the pound fell nearly 5% on Tuesday after the announcement of the U.K.'s big bank bailout on Monday. The article reads,
"European Union finance ministers warned that they are running out of room to spend money to boost their economies, as Germany predicted its economy would shrink at least 2% this year and Hungary's currency fell to a record low despite recent efforts to prop it up."
Today's Wall Street journal also reported that Belgian bank shares are falling and that Belgium may have to administer bailouts on a large scale to its banking industry.
One of the great ironies of this global financial crisis, which we commented on back in October (post 1 and post 2), is that dollar denominated assets have become the "safe haven" in a global recession that was caused by the U.S. Bank stocks in the United States have also been plunging because of the fear of inefficient government control, but the U.S. can still borrow at very low rates in the international market. We seem to be winning this "international bailout arms race," although I suspect the victory will come at a cost in the long-run of both good-will and international openness.
(Thanks to Wills Hickman for research assistance on this topic.)
UPDATE: Ian Bremmer and Nouriel Roubini added today (1/23/09) on the Wall Street Journal opinion page to the list of countries likely to fall in the international bailout arms race. They include Romania, Bulgaria, Argentina, Venezuela, Ecuador, Mexico, Pakistan, Indonesia, South Korea, Russia, and Ukraine. Bremmer and Roubini actually used an arms race term to describe the economic situation: "mutually assured economic destruction."
