Was The Greece Bailout, A Bailout of The Euro System?

Here are two great charts depicting why European policymakers opted for bailout route for Greece.

Albeit the perspective from these charts strictly focuses on the financial system and not the political facets.

To aptly quote the analyst interviewed by the New York Times, "This is not a bailout of Greece...This is a bailout of the euro system.”
Europe's banking system has been deeply interconnected....

Again the New York Times, ``For all the handwringing, the reality is that the Germans, the French and the rest of Europe have little choice. In the decade since the introduction of the euro, the economies on the continent have become increasingly interwoven. With cross-border banking and borrowing, many countries on the periphery of Europe owe vast sums to one another, as well as to richer neighbors like Germany and France." (bold emphasis added)

where the amount of exposure has been substantial.

To quote the Economist, ``Estimates by The Economist put the total euro-area exposure of foreign banks to Greek sovereign debt at €76 billion, with over 71% held by France and Germany. Estimates for Portugal, which may also be vulnerable to a default, are €32 billion. Little wonder that investors are taking flight."

The argument that Europe have little choice rests on the fundamental premise of the operating platform of the Euro system.

As Gavekal's Charles Gave argues, ``Indeed, the balance sheets of European banks and insurance companies are heavily distorted by past investments made in the debt of technically bankrupt governments. For the past 15 years, banks and insurance companies all over Europe have been lured into believing that the Greek risk was equivalent to the German risk, or the Spanish risk similar to that of the Dutch, etc. As a result, the capital of too many financial institutions was invested in very dubious paper.

``Moreover, in the countries which have "enjoyed" a massive real estate bubble (Spain, Ireland...) because of the distortions in the cost of money introduced by the Euro, the banks are now loaded with real estate loans of very questionable value. To add insult to injury, regulatory powers all over Europe have literally forced banks and insurance companies into buying the bonds issued by European governments ("risk free" they were told, and zero reserve requirements!) while forcing them to sell good quality equity positions established over decades. So whether one looks at balance sheets, reserves, loan books or future sources of income, it is hard to avoid the conclusion that European financials are in a pickle. This is a true and very unfortunate consequence of the Euro." (all bold highlights mine)

In gist, the problem is with de facto monetary system, which I don't think is limited to the Euro but to the concurrent paper money standard.

When regulators compel or require the financial system to buy government debts as part of the 'risk free' reserves, this essentially signifies as subsidies to government expenditures which consequently induces more spending, regardless of the necessity.

Said differently, government debt is considered "risk free", because it is backed the barrel of the gun via taxation. However, taxation can only finance part of these expenditures because they depend on the performance of the entities that operate on the real economy.

So in order to continually fund burgeoning government expenditures, central banks encourage deficit financing by inflating the system. And inflating the system engenders a feedback mechanism that leads to an unsustainable Ponzi financing system combined with intractable government spending. The charts above simply illustrates this dynamic.

And as the Greek crisis has shown, reality eventually dawns on the fictitious world where spending equals prosperity and where 'risk free' isn't what it had seemed.

And this is further proof that the cartelized system from which the central banking operates on exist to serve political goals. Fiat paper money system is highly political.

Mr. Gave, a prominent Euro bear, argues here that the disintegration of the Euro will be bullish for markets and the global economy as the political "Roman Empire" wisdom from which lays as the foundation to the EU's concept of "centralized super-government" will pave way for freer markets.

But I don't believe that the political elite in the Eurozone will easily succumb to free market forces knowing that free markets would emasculate their privileges. Perhaps, not until economic reality totally overwhelms the fantasyworld.

I see this as happening farther down the road.

So yes, the bailout translates to a rescue of the Euro system.

Update: Addendum: Greece's bailout will need to have the commitments of the financiers ratified by their respective governments (parliaments).