Monday, October 24, 2011

Should trading partners get bailed out?

France and Belgium are in the process of bailing out the bank Dexia. Dexia made some bad bets, not just on debt from Greece, Portugal, Italy and Sain, but also on interest rate movements. If Dexia failed, it would not be able to meet obligations to its trading partners, many of whom are U.S. financial institutions.

When the U.S. bailed out AIG, it fully met AIG's obligations to European institutions. Many in the U.S.  were upset about the large tax-payer funded flows overseas. Can and should U.S. financial institutions expect the same treatment?

For more read:
NYT (10-23-2011) Bank's Collapse in Europe Points to Global Risks by Gretchen Morgenson and Louise Story

For a good short (<5 min) video news story about Dexia and the Euro Crises

Some thoughts for discussion:

1. Should trading partners be paid in full? Should trading partners take a haircut as a penalty for not being more careful with whom they traded?
2. Would increasing the risk of loss shrink international financial markets so much that real economies would grow slower in the long run?
3. Since the U.S. honored payments to AIG's European trading partners, should Europe honor payments to U.S. trading partners?

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