The European Union (EU) creates a $1 trillion fund to help Greece and other European countries in need. What does this mean and what are the consequences?
This bail-out allows banks to sell their bonds to the EU for a overvalued price. So the banks go out (of Greece and other poor performing countries) and the EU gets in. The EU borrows the money necessary to buy the bonds from the same banks and has to pay interest on that loan. The consequences are: you will find yourself without a job, or if still employed you will have to work harder to keep up your lifestyle.
Too complex, try this:
Greg has a $1000 loan with 20% interest, therefor Greg pays every year $200. Now Greg is laid off and has difficulties paying the interest on the loan. The bank wants to get rid of the loan because the chances that Greg finds a new job are slim and as a result, Greg will declare bankruptcy. In that case, the bank loses $1000 plus the $200 yearly interest.
Greg’s bank tries to sell the loan to other banks. Selling a loan means selling the rights to receive interest on the principal. In this case that is the $200 yearly plus a one-time $1000 at the end of the loan period. No other bank wants to buy the loan. It is simply too expensive for the risk that Greg is not going to pay the loan at all (bankrupt).
Edward Europe helps
Finally, Greg’s uncle Edward Europe buys the loan from the bank. Let’s say Edward Europe pays $1200 for the loan. Edward doesn’t have the money so he also borrows that from the same bank against 10%. Edward Europe must pay the bank $120 yearly, and Edward Europe gets $200 from Greg.
When Greg goes bankrupt, Edward Europe stops receiving money from Greg. However, Edward Europe still has to pay the bank interest. How can Edward Europe pay the bank without getting money from Greg? Edward Europe has to fire the cook and the cleaning lady and cuts the salary of the gardener all to save on expenses and pay the bank.
