The State of the PIIGS

Here's the one chart that explains the eurozone crisis. Market participants are requiring higher and higher interest rates to hold debt issued by the PIIGS. The higher interest rates make it more and more difficult for the PIIGS governments to bring their budgets under control.

The only sound solution is for the PIIGS to go bankrupt and stick the hurt on those who were willing to hold the PIIGS paper in the first place---mostly the banksters. Instead, the PIIGS, with the banksters in the shadows, are imposing austerity (read: higher taxes) which smothers the PIIGS economies even more. Thus, the European Central Bank will eventually step in to prop up the sovereign debt by money printing, which will result in huge price inflation in the EZ.

Click on chart for larger view,

Roubini Categorizes the Eurozone Countries: From Paradise to Hell

Nouriel Roubini is terrible in economic theory and doesn't have a clue about gold, but he is as tied in as an economist can get with the power elite. So when it comes to economics/politics, Roubini is worthwhile paying attention to. Below is Roubini's take on the EZ countries and their current relative financial strength. There is nothing earth shattering here, but it is the first time I have seen them all categorized.

EZ: Hard Core (Germany, Netherlands, Finland, Luxembourg, Slovenia,..), Soft Core (France, Belgium, Austria) & PIIGS (Greece, Ireland, Portugal, Italy, Spain, Cyprus).Or Paradise / Purgatory / Hell

Tyler Cowen who is Generally Good on Food Gets the PIIGS

He thumbs:

Keep in mind: everything happening with Ireland is simply a shadow play for Spain-to-come.

This Will Not Go Down Well with the PIIGS

European Union finance ministers pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts, reports Bloomberg.

“We will provide new sanctions, more than is now provided,” EU President Herman Van Rompuy said after the four- hour brainstorming session in Brussels yesterday. “Everyone is ready to go ahead with a strong stability and growth pact.”

Like the rest of the plans this won't work. The PIIGS citizens see these sanctions, correctly, as the banksters squeezing the life blood out of them.

What really needs to occur is the exact opposite. Those countries that can't pay their bills need to go into bankruptcy. Each country should also revert back to their own currencies and each should manage their own affiars. The great one world unions are a failure. The patch jobs will only delay the inevitable collapse and make it worse.

ECB: New Bond Program Essential to Policy Execution

The European Central Bank said Thursday its new program to buy government bonds on the open market was “essential” to ensure that its monetary policy continued to have the intended effect, reports WSJ.

“The Governing Council considers the…measures essential in order to ensure the effectiveness of the monetary policy transmission mechanism,” the bank said in its monthly report for May. “In particular, the measures will help to mitigate the spillover of increased financial market volatility, liquidity risks and market dislocations in the access to finance in the economy.”

Uh, no kidding. Money printing is the key to the madness. How much printing? It will be Tuesday's with the ECB to find out.

Details are likely to only be available in the ECB’s weekly financial statements that are published every Tuesday.

Gary North on the State of the Crisis

Some great observations from North:

The politicians of Northern Europe buckled. The PIIGS chuckled...

You may remember how well shock and awe worked in Iraq. We are still there.

Already, columnists are writing articles about the possibility that this bailout will not be enough.

The Establishment has only two policies: deficits and monetary inflation. This is basic Keynesianism...

Bankers trust governments. They trusted the Greek government to meet its next interest payment on May 19. On April 23, the Greeks began playing the Hank Paulson card. The banks saw the possibility of a default. Bank shares started falling. So, bankers got to work. They, too, played the Paulson card. The S&P downgrades added credibility to the scenario. There was a threat of a systemic breakdown.

The bankers' solution is the tried and true strategy of moral hazard, described by Walter Bageot in the late 19th century. The banks are bailed out by politicians and central banks. Losses are transferred to the taxpayers by way of bailouts and currency depreciation. The day of reckoning is postponed.

For the first time in Western history since the late nineteenth century, a few million voters are beginning to catch on. They don't understand fractional reserve banking, but they understand when politicians raise the national debt to bail out people who cannot pay their interest on time.

Voters in Germany resisted. This accomplished nothing. As they were going to the polls, Merkel was selling them out to the PIIGS and the banks that trusted the PIIGS, especially French banks, which own a third of Greek debt.

It is beginning to dawn on a minority of voters that the political game is rigged in favor of big banks. It has taken a century for this to begin to register. This is a threat to Establishments everywhere. This was the #1 secret that the Establishments have attempted to conceal...

The Establishments for a century have used the greed of the voters to create a money tree for bankers. Here is how it has worked, ever since the years just prior to World War I.

The politicians promise the voters revenue from the rich. The voters are promised government jobs, government support for labor unions, and old age pensions. The welfare state grows.

The politicians refuse to raise taxes enough to meet these commitments. They use "pay as you go" accounting.

The governments run debts. Investors buy these debts, because they are guaranteed by the government. The debts are seen as risk-free.

Wars break out. Governments then run larger deficits. These debts are never repaid. They always increase. Old debts are rolled over.

The governments keep selling promises to voters. The voters keep believing they will be paid off someday.

When tight times hit, central banks buy government debts with fiat money. They roll over these debts. The debts grow.

Any threat of default threatens the commercial banks. When a crisis arrives, governments and central banks bail out the largest commercial banks.

The voters do not revolt because they are up to their elbows in personal debt. They have no savings. They rely on government promises. They do not want a default.

Keynesianism is an economic system that praises government debt as the source of stability and long-run prosperity. Original Keynesianism argued that government debt could be reduced in boom years. It has never happened anywhere. Politicians raise the debt load, year by year. The debt grows.

The voters dare not stage a tax revolt, because they might threaten the solvency of the government. The government might cut back on welfare spending for the aged and for the unemployed.

This is a daisy chain of promises (debt), all resting on taxation.

Government writes IOU's. Banks and insurance companies buy these IOU's. The government writes more IOU's. In a crisis, the central bank buys these IOU's. The voters grouse, but they do not revolt.

Whenever the voters say no to bailouts, the politicians ignore them. They know that the voters do not really want to cut spending.

Banks want more government debt to buy. Governments want more debt to buy more votes. The voters want to believe that the promises will be kept.

It's a ménage à trois of seduction. Each participant promises to love two others forever. Bankers promise to buy the government's IOU's. Governments promise not to default. Bankers promise depositors they can withdraw their money at any time. The government guarantees the depositors that their deposits are insured (in the United States – not Europe). Voters promise to keep voting for the party that forks over the most welfare to their special interest groups.

As the madam in charge, the central bank promises the governments to serve as lender of last resort. It promises bankers low interest rates. It promises voters to act in the interest of voters to keep down inflation and keep employment high.

The arrangement is now breaking down. The level of debt is creating opportunities for currency speculators to expose the lies of governments and central bankers. There are huge profits at stake in this showdown...

The game is the rollover of debt. In 1980, there was a low-budget movie, Rollover, with Kris Kristofferson and Jane Fonda. It dealt with the rollover of Arab oil money. It had the basic scenario correct. The threat really did exist in 1980. But the Federal Reserve let interest rates climb, and the prices of oil and gold fell. The day of reckoning was deferred.

The threat has reappeared. This time it is not Arab oil money. This time it is the unthinkable: sovereign debt defaults. The stakes are far higher. The agencies of the bailout now need bailing out.

Because the entire credit structure rests on the continuation of the rollover of sovereign debt, the Greek crisis, which began on April 23, escalated into a trillion-dollar guaranteed bailout within three weeks. The ECB said "no problem" on April 26. On May 9, it completely capitulated.

Compare this with the United States, from the first weekend of September to the middle of October. Paulson nationalized Fannie Mae and Freddie Mac in early September. A week later, Lehman Brothers went bankrupt. On October 3, Congress voted the $700 billion bailout. That was three weeks.

If the system is reliable, why do these crises keep happening? If there was a solution to the bad debt problems in late 2008, why did there have to be a $960 billion bailout this week?

It is the rollover problem. That was what took down Bear Stearns. That was what took down Lehman Brothers. In just days, these two giants could not find buyers for their debt. They had leveraged themselves by 30-to-one on the assumption that the rollover would continue forever. It didn't.

This is the threat to the European banking system. When a sovereign nation defaults, it calls into question the continuation of the rollover. That calls into question the entire world economy.

Everything rests on lines of credit: promises. These promises can be broken at any time, for any reason. The debtor just stops paying. When a national debtor stops paying, the dominoes begin to fall.

The dominoes were ten days from the first toppling: May 19. The politicians, the central bankers, and the IMF decided on Sunday that the risk was too great. They paid off the G-PIIG. They sent a message to the other PIIGs that the trough would be filled up with euros, just as every PIIG knew it would be.

The voters can protest, but if they are unwilling to get their snouts out of the government troughs, they can expect no relief. I do not think they are ready to do this. So, the rollovers will continue. The level of sovereign debt will rise.

As for cutbacks in Greek spending, ho, ho, ho. As for austerity in Southern Europe, ha, ha, ha. Once you owe the banks up north a trillion dollars, you will get the politicians up north to sell more debt, so that you can meet your interest payments to their banks, and then sell more debt at low rates.

Debt will rise. That is the inescapable reality of moral hazard. Bank profits will go on, because bank losses are transferred to sovereign governments. Nothing has changed. The same old system rolls on...

It has come to England. It is about to come to Germany. In 2011, it is likely to come to the United States. At that time, there will be no spending cuts, but there will be resistance to any further expansion of programs. The debts never fall lower. The built-in spending will be sufficient to keep the deficits high.

The United States annual budget deficit to GDP ratio is around 10. In Greece, it is 14. It has been around 6 in northern Europe, excluding Ireland and Great Britain. It will now rise because of the bailouts. The Greek debt disease has spread to the north. That was the price of keeping the Greek default disease from spreading through the south.

The gridlock will slow down the extension of the debt a little, but the built-in increases in old age spending are enough to guarantee another crisis. The banks in Europe are still highly leveraged. They are not writing down these debts. The result is continuing vulnerability.

The speed of the crisis indicates that the next crisis will take even more money to paper over. Political gridlock will make it harder next time to persuade the politicians to put their careers on the line for the sake of the banks. The ECB will have to intervene as the lender of last resort. It will resist, but its job is to save the large banks. The large banks will again need saving.

The size of the bailout indicates that the leaders really did panic over the weekend. The markets moved higher on the assumption that an extra trillion dollars of government debt will be no problem. There will be buyers. The PIIGS will get their rollover money from the banks, because the banks have gotten the go-ahead guarantees from the more solvent north.

CONCLUSION

We see no solution. We only see political kick-the-can. The politicians believe that rising government debt is forever. It can rise without meaningful cost. There will always be buyers. The banks and insurance companies trust the promises of the politicians, who write IOU's on behalf of the voters.

When the voters resist, the central banks come to the rescue. They play demure briefly. They say "this time, but never again." But they always capitulate.

The day a major central bank really does stabilize money is the day that the dominoes really will fall. The rollovers will at last end....

It will not be because debt is too big to roll over. It is never too big to roll over. It will end only because central bankers see that monetary inflation will undermine the national currency through hyperinflation. That will threaten their pensions. Their pensions are funded, for the bank has the power to fund them. But if the money is worthless, the central bankers will lose. If they cease inflating, they will win. They will have money to spend in a time of depression and deflation.

That is not today. With short-term rates under 1%, and consumer prices not rising, the central banks are not facing an immediate crisis. When the next one arrives, they will do whatever is necessary to keep the rollovers going.

The welfare state is going bust. The level of sovereign debt guarantees this. The politicians will take on as much debt as it requires to keep the rollovers going.

Gary North is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
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Obama Muscled the European Union to Bailout the PIIGS

It took American muscle to get the Germans to cough up big bucks to bailout the Greeks. President Obama, no doubt urged on by his bankster controls, put in the calls to European leaders, including Angela Merkel and Nicolas Sarkozy, to bailout BIG. NYT has the mad details:

President Obama had just flown into Hampton, Va., Sunday morning to deliver a commencement address. But before he donned his silky academic robes, he was on the phone with Chancellor Angela Merkel of Germany, offering urgent advice — and some not so subtle prodding — that Europe needed to try something big...Mr. Obama told Mrs. Merkel that the Europeans needed an overwhelming financial rescue to end speculation that the euro — and European unity — could crumble.

“He was trying to convey that he knew these were politically difficult steps that the leaders there had to take, that he had gone through them as well,” said one senior administration official familiar with the conversation. “And that, from his experience, trying to get out ahead as much as possible was the right way to go.”

That call was part of what a senior Treasury Department official called “one long conversation” with European leaders, who over an extraordinary weekend of late nights and early mornings overcame German resistance and agreed to a wholesale expansion of the bloc’s political and financial mission. Bending the rules, they backed the stability of all 16 countries that use the euro with loan guarantees adding up to nearly $1 trillion.

You just know some heavy bankster money had to be on the line somewhere. I wonder how much input came from President Obama's favorite banker, Greek-American Jamie Dimon?

But apparently Obama's silver tongue was not enough, As NYT put it:

Washington was also ready to help, in a limited but crucial way. The Federal Reserve offered to swap euros for dollars, easing pressure on European central banks, which were bleeding dollars.

NYT did not inform their readers of how "limited" this swap might be, so it is difficult to know for sure. However, according to the NY Fed, the last time the Fed launched currency swaps during the current financial crisis, the Fed pumped out $560 billion worth.

The Arrogance and Ignorance of the Political Elite: A Case History

German Chancellor Angela Merkel clearly understands what the financial crisis fight is about, but she is severely overestimating her chances of wining. Given that she is a member in good standing of the global political elite, it is fascinating to analyze how absurd her arrogant and economic illiterate comments are about the ongoing crisis.

Merkel said on Thursday:

In some ways, it’s a battle of the politicians against the markets. I'm determined to win. The speculators are our adversaries. That’s why we have to weigh our words more carefully than ever and stand united.

Could she possibly understand the impossibility of what she is saying? She is going to fight the markets, she says. Does she understand that "the markets" are millions of people transacting business for their mutual benefit? Does she really believe that politicians have the power to reverse markets? Does she understand that throughout history governments have attempted to stop market activity, but have only succeeded in distorting market activity, but never killing it. From price controls to drug laws, the history books are filled with attempts by governments to move markets in a way they do not want to go. The history books are also filled with the failure of these attempts. Yet, the Chancellor tells us that by politicians weighing their words and standing united that they are going to somehow beat "the markets."

 Let us look at  the current crisis where the Chancellor wants to battle ""the"markets.". Specifically, let's look at Greece. The government of Greece does not have enough money to pay all its bills. As this becomes more and more obvious, fewer and fewer people want to hold Greek debt. Thus, the interest rate on Greek debt continues to climb to attract buyers of that debt, who are willing to bet that Germany and other countries are going to be  bailed out by Greece and others. How is the Chancellor going to battle this by weighing her words? What does standing united mean? Other countries either pony up to pay the Greek government's tab or they don't and Greece defaults. Those are the options. To speak of battling "the markets" in this situation, pretty much means that by "weighing her words" she thinks she is going to convince investors to buy Greek debt without Germany, or anyone else, ponying up and paying the difference that exists between what Greece owes and what it has available to pay its debt.

Looked at it from this perspective, the Chancellor sounds like a short-game con artist. She will say or do anything to keep the con going one more day. That is the long and short of what she really means when she talks about weighing her words. It's a con, a not very sophisticated con, but a con none the less.

It is only a supreme arrogance and ignorance that could result in the Chancellor declaring that it is politicians against the markets and that she wants to win. She doesn't have a chance. At the end of the day, she and her political global cronies are going to have to either pony up with more money or they will see some defaulting PIIGS.

Moody’s Raises Sovereign Contagion Alert

The cost of protecting European bank bonds from default surged to the highest level in 13 months as Moody’s Investors Service said lenders face “very real, common threats” from the region’s fiscal crisis.

Banking systems in Greece, Portugal, Italy, Spain, Ireland and the U.K. may come under pressure as the crisis worsens, Moody’s said in a report today, according to Bloomberg.

“The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. “If governments can’t issue at relatively normal levels, it’s going to be very difficult to bail out banks and that means banks are getting hammered

Huge Bets on Euro Core Zone Meltdown

There was a stunning $630 million, $558 million and $370 million in net notional derisking last week. Huge negative bets were made on France, UK and Germany, not just in sovereigns but in all names, reports ZH.

The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million.

This is extreme panic, worse than September 2008, when the money market Reserve Fund broke the buck.

It is quite possible the PIIGS don't survive without default, but the UK isn't going that route. The UK is in a completely different situation. It controls its own money so it can print its own way out of their debt hole. This is very inflationary, but it is likely what they will do, rather than default.

Further,  there is also no reason to bet against private triple A German debt. The German economy will survive.

Crisis breeds opportunity. Stay alert.

HOT: Bankster in Panic to Meet with His Controls

The veil is lifted.

The revolution has hit the streets and who do the bankster tools run to? Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase CEO Jamie Dimon.

In total panic, the European Union’s financial services commissioner, Michel Barnier is in the United States where he is meeting, according to NYT, with:

Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner. He will also meet with Wall Street titans like Lloyd C. Blankfein, the chief executive of Goldman Sachs, and Jamie Dimon, the chief executive of JPMorgan Chase.

With the PR skilz of Geithner and Blankfein in the room, the next move by the banksters is likely to have the kids rioting by the end of the month in Disneyland.

PIIGS Debt Panic!!

Greek CDS 855, Portugal 400

Will Germany Ratify the Greek Bailout?

There is no question that international banksters are in high gear. They are pushing Greek legislators to ratify the agreed to Greek bailout. Will they buckle to the pressure? The bailout is hugely unpopular in Germany, but legislators of late appear to buckle when pushed by global banksters, even if it ultimately means the legislator losing office.

European Central Bank council member from Germany Axel Weber, who from time to time has displayed some ability to understand basic economics is clearly all in with the banksters, when it comes to the bailout. He said Greece’s fiscal crisis is threatening “grave contagion effects” in the euro area, justifying Germany’s contribution to a 110 billion-euro ($142 billion) aid package.

“There is a threat of grave contagion effects for other member states in the monetary union and increasing negative feedback loop effects on capital markets,” Weber said in a statement today as German lawmakers in Berlin debate the proposed rescue of Greece. “All in all, Germany’s contribution to the aid package for Greece is justifiable.”

The warnings of contagion are true enough, but why is it Germany's duty to bailout the PIIGS out? Defaults by these governments simply mean the banksters take the hit instead of the German people.

Another tool of the banksters, German Chancellor Angela Merkel appealed to parliament to approve Germany’s 22.4 billion-euro portion of the joint European Union- International Monetary Fund bailout amid public opposition.

“Weber is worried,” said Juergen Michels, chief European economist at Citigroup Inc. in London. “He knows that if Germany doesn’t ratify the Greek aid plan rapidly we’re facing more turbulence in the weeks ahead.”

HOT: Merkel's Coalition Calls for 'Orderly Defaults'

The end is here.

German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states burdened with debt to avoid a repeat of the Greek fiscal crisis, reports BW.

Floor leaders of the three coalition parties also agreed in Berlin today to put a resolution to parliament alongside the bill on Greek aid calling for the European Union to revise rules for the euro to put pressure on countries that run deficits.
 
Meanwhile, in Spain, where the problems of Greece look like pocket change, Spanish Prime Minister Jose Luis Rodriguez Zapatero told reporters in Brussels that speculation of a bailout for Spain is “complete madness.”

Credit Default Swaps Climb for Greece and the Rest of the PIIGS

The IMF/EU bluff continues to show indications of failure.

Credit-default swaps on Greece surged 84.5 basis points to 731, according to CMA DataVision prices, implying an almost 45 percent probability of default over five years. Contracts on Portugal, Spain, Italy and in trouble.

Unless the "nuclear option" of huge money printing is implemented, defaults are likely to happen.

It's a Crisis of the PIIGS, Not Just Greece

That's the verdict from markets, overnight.

The IMF/EU bluff does not appear to be calming markets. WSJ has the details:

...investors were focused on Europe, where worries about sovereign debt weighed on European equities and sent the euro 0.5% lower. The unease stemmed from concerns over Greece's aid package and speculation over the possibility of another debt downgrade for Spain. The Stoxx Europe 600 slid 1% in late morning trade.

The Greece aid package "as it now stands is certainly to be welcomed and may have assuaged market concerns had it been announced three to four months ago," said Michael Hart, a strategist at Citi. "But at this point, the situation has developed from a mere Greece-crisis into a full blown euro-zone sovereign crisis. And European policy makers continue to trail events in formulating their response," he said.

"Talk about Spain is weighing on the market, given that banks would be most exposed since they hold government bonds," said a London-based analyst, referring to what he said was market speculation that Spain could ask for an aid package. "Any news on sovereign debt reflects directly on bank stocks."

Greeks Riot in Advance of a Wednesday Strike

NYT has details:

Tens of thousands of demonstrators took to the streets across Greece on Saturday, including hundreds of black-clad youths who clashed with the police here, as Greeks vented their rage at tough new austerity measures aimed at securing aid and avoiding a debt default...Police estimated that 17,000 people protested in Athens. They said 10 people were arrested and reported no serious injuries..On Sunday, Prime Minister George Papandreou is expected to announce cost-cutting measures totaling 24 billion euros (about $32 billion) that will include freezing public-sector salaries, raising taxes and slashing pensions. In return, Greece is expected to receive up to 120 billion euros in aid over three years.

Keep in mind that this is only the first inning of what will be a long crisis. Along with the bailout money comes the higher taxes, pension cuts etc. of the IMF demanded "austerity programs." The Greeks view this , quite correctly, as their money being taken from them for the benefit of international banksters. That's what the riots are about, which adds an element of potential social breakdown. The Greeks aren't docile Icelanders. No one really knows how this will end up. No one.

As for the money, a bailout of 120 billion over the next three years for Greece will delay the Greek debt crisis for awhile, but that only means the money focus turns to Spain. Spain needs 179 billion euros, not over three years, but this year. And they know how to throw a pretty good riot, themselves. With 20% unemployment in Spain, they have a pretty decent ready made army sitting around doing nothing that can take on the government. Then there is the unknown quantity, Italy. Italians are big savers, so they have been absorbing a lot of the debt the Italian government has been kicking out, but this year that number will  balloon to 338 billion euros (87 billion via an increase in the deficit, the other maturing debt). No one knows how much the Italians are willing to absorb of that. In 2009, the deficit of the Italian state budget made up 5.3 percents while the debt of the country reached 1.761 trillion euro or 115.8 percents of GDP. Thus, we are talking at least a 5% increase in the debt of the country.

Bottom line the Greeks, Spaniards and Italians all no well what the Greek, Sophocles (496 -  06 BC, meant when he warned  in Ajax:

Foes' gifts are no gifts: profit bring they none.

The modern day translation would be something like:

IMF bailouts are no gifts; There will be profit for us none.
Indeed, they will end up taking, and that, oh woe, won't be fun.

What Really Patches Up the PIIGS Crisis (Short Term)?

$2 trillion dollars patches up the problem through 2013. Total current IMF bailout capacity: $700 billion. A bit short.

Further, keep in mind that these countries are black holes for money. $2 trillion would only resolve the current money needs. There is no indication at all that any of these countries have any plan to resolve their continuing crises  in any way other than counting on bailout money.

Here's a Bank America table that  details the debt coming due and the deficits, for the next three years, on a country-by-country basis,  for the PIIGS:

Click on table for larger view.

(ViaZeroHedge)

Spain's Unemployment Rate Above 20%

Spain's National Statistics Institute said Friday that first-quarter unemployment rose to 20.05% from 18.83% in the fourth quarter of last year.

This is part of the problem that makes Spain the Big Daddy in the PIIGS crisis. Not only do they have huge debts coming due in July, but the economic wreck that Spain is means that there is nowhere to squeeze to help bring future deficits down.

The Greeks may not like it, and it certainly isn't right, but the government has room to squeeze and raise taxes , but how are you going to raise taxes on a country with 20% unemployment, and in the middle of a housing price collapse?

How to Solve the EuroZone Crisis

The current EuroZone crisis is fast approaching a monster size that will be too0 big to solve, or at least solve in a manner  that &nbspsp;  the founders of the EU would like it to be worked out. i.e. a via global bailout.

Simon Johnson, former chief economist at the IMF, has an excellent run down of the problem:

There are three possible scenarios.  First, the ECB may be allowed to really let loose with “liquidity” – and somehow buy up all the bonds of troubled eurozone nations.  But this is exactly the process that always and everywhere brings about high inflation.  The Germans would fight hard against such a policy, although it would prevent default.

Second, officials still hope that bond yields for weaker governments widen but then stabilize.  This is bad news for troubled eurozone countries, but they manage to avoid default.  The rest of the world grows by enough to pull up even the European “Club Med + Ireland”.  Call this the trickle down scenario or just a miracle.

Most likely, the situation is about to turn much worse and a third scenario unfolds.  The nightmare for Europe is not at this point about Greece or Portugal – it is all about Italian and Spanish bond yields.  This week those yields are rising quickly from low levels, while German yields are falling – so this spread is widening sharply.  The yields for Spain – for example – are rising because hitherto inattentive investors, who always thought these bonds were nearly as safe as cash, suddenly realize there are reasonable scenarios where those bonds could fall sharply in value or even possibly default.  Given that Spain has 20% unemployment, an uncompetitive exchange rate, a great deal of public debt, and a reported government deficit of 11.2 percent (compared with headline numbers for Greece at 13.6 percent and Portugal at 9.4 percent), everyone now asks:  Does a 5% yield on Spain’s ten year bonds justify the risk?  The market is increasingly taking the view that the answer is no, at least for now.  So, we can anticipate Spanish (and Italian) yields will keep rising.  In turn, this causes other asset prices to fall in those nations, thus worsening their banking systems, and hence leading to credit contraction and capital flight.  It is a dismal prognosis.

Then it gets worse.  As rates rise, traditional investors in euro zone bonds, which are pension funds and commercial banks, will refuse to take more.  There will be no buyers in the market and governments will not be able to roll over debts.  We saw the first glimpse of this on Tuesday, when both Spanish and Irish short term debt auctions virtually failed.  Once this happens more broadly, the problem will be too big for even Mr. Trichet or Ms. Merkel to solve.  The euro zone will be at risk of massive collapse.

After this solid analysis, Johnson then makes the astounding call for a trillion dollar bailout of the PIIGS.This magical sum would be paid for by citizens of this planet. (Simon is apparently taking Stephen Hawkings advice not to talk to aliens).

Bottom Line: The EuroZone Crisis is too big to be solved by bailouts without huge pain inflicted, via taxation and/or inflation, on citizens of this planet who had nothing to do with creating the crisis.

Here's the only realeconomik way out that makes sense.

The EU should be  split up from it's current form. It should simply become a trade organization (Think NAFTA). Each country reverts back to its own national currency. Each country then solves its own debt problem. If a country wants to print their way out of the crisis, and suffer the inflationary consequences, good luck to them.

The best solution, under this scenario, would be for each of the PIIGS  to restructure their debt, i.e. default. The lossess would be limited to the debt holders, largely European banks. Each country would then have to decide whether or not to bailout the the banks in their own country that would come under pressure. The recommended solution would be to allow them to fail, but each country should be allowed to handle this in their own way.

For the countries that make the  wise choice of default, without a bailout for the banks, they would find themselves in a situation with a strong currency and the potential for putting their financial house in order, as union leaders could no longer argue that the budget cuts were only a payoff to global banksters.

There are no easy solutions, but unified global action is oppressive, potentially inflationary, and only a stop gap measure. Compartmentalizing the problem, country by country, provides incentives for each country to put its own financial house in order. But most importantly, it builds firewalls around the countries that refuse to bring their financial houses in order, so that  crises do not spread in terms of bailout demands. Therefore, incentive turns not to countries to provide bailouts, but for countries in trouble to adopt sounder fiscal practices.