Euro Bailout? Will U.S. Have to Step Up to the Plate?
In a crisis, worst-case scenarios can be dangerous because they distract the public and policymakers from the mundane task of wrestling with immediate problems. However low the probability, if the European sovereign debt crisis rapidly cascades from bad to worse, the United States could be called upon for help in another massive bailout.
If efforts to stem the current bleeding in Europe fail; if Portugal, then Spain, and perhaps others need outside assistance, existing European bailout funds may be stretched too thin. Europe may be forced to look for more help from the International Monetary Fund (and by extension the U.S. Treasury), the U.S. Federal Reserve and China. How Washington reacts could have grave foreign policy and economic consequences. In May, the 16 countries that use the euro established the European Financial Stability Facility, which amassed roughly $579 billion in pledges that can be used in conjunction with $79 billion backed by the EU budget and $329 billion from the International Monetary Fund, creating a $1 trillion pot of money available for lending to beleaguered European states.
The question now is whether this financial safety net will be sufficient. Both the Greek rescue package late last year and the recent Irish bailout cost more than first advertised. Some initial estimates put Dublin’s needs at $100 billion. Its final price tag was $112 billion.
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