Europe continues to bumble from one band aid to the next, and continues to just add more and more debt on already weak countries and weak banks. Whether it is loans to sovereigns, or the ECB loaning liquidity lines to banks, it is still debt which must eventually be serviced and potentially reduced, if not repaid. That debt service drains available capital from the banking system which could otherwise be available for lending. It strains fiscal initiatives that might come from governments to prime the pump. Combine that with some higher taxes and there is no way Europe is ever going to grow its way out of the mess. The banks have been forced to compound the problem by using the ECB liquidity lines to buy the sovereign debt of the mother countries in order to try to keep the cost of capital somewhat manageable for the sovereign. This cannot continue much longer. It is purely a cycle of debt on debt which can only end in collapse.

In a bankruptcy the solutions are a cram down of the debt, a stretching out of the payments, and more equity. It is not adding debt to debt and nothing more. DIP financing is purely a stop gap to the above steps. Often the other major step is a change in management and a shrinking of the business by selling off lines of business and assets to generate cash and reduce losses of cash.

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