TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Arnold Kling comments on the European Union’s bailout of debt-ridden members:

My take is that this is like TARP in that it treats the European debt crisis as a liquidity problem, when at least in part it is a solvency problem. Lately, I have seen several writers argue that a Greek default is inevitable, and no one seems to argue otherwise.

Suppose that banks had to write down the value of their Greek debt by 30 percent or more. At the very least, this would eat significantly into their capital, and they would have to curtail lending. This in turn would make funds scarce for other sovereign debtors. In some sense, this is what should happen–interest rates should rise, and financial intermediation should contract.

As he points out, the problem is this isn’t simply a liquidity issue (e.g. banks have stopped lending, but the country’s finances are actually strong). This is a solvency issue. These countries are in terrible shape financially.

Like TARP and the nationalizing of Fannie Mae and Freddie Mac here, this only extends the inevitable. These countries still need to fix their fundamental problem, and this is just prolonging the pain.