Over the last two weeks, we’ve focused on the U.S. market impact of the EU financial debacle. Now, we’ll turn to its political impact – Republicans are revving for a fight with the Obama Administration on the “bailout” of dead-beat Europeans. The substantive merits of this campaign are dubious, but it’s a political winner. The White House and any vulnerable Democrat that can be linked to a “bailout” are the Republicans’ prime – indeed, easy – targets. But, big banks will take a lot of collateral damage along the way, if only because Congress is finding this so much fun. Could Congress force the U.S. to renege on its commitments? We don’t think so. But, will this be ugly and undermine financial stability? For sure.

As clients have painfully learned, the GOP’s primary focus on the political side of the reform legislation’s ledger is that the bill’s a big-old bailout for banks and the GSEs. Now, new targets – spendthrift Europeans, feckless global bureaucrats and, again, big banks – are in sight. That anti-bailout fervor is running in tandem with the EU rescue was evident yesterday, when a group of senior House Republicans introduced the “European Bailout Protection Act.” On the Senate side, the head of the National Republican Senatorial Committee, Sen. John Cornyn (R-TX), filed an IMF amendment to the financial reform bill. It’s due up on the Senate floor Monday, and we rather doubt that tempers will have cooled by then.

We haven’t had time to review these proposals in detail. The Cornyn amendment forces the U.S. to decide if any IMF loans to Greeks or similar happy-spending foreigners could ever be repaid. If not, no dice from the U.S. executive director to the IMF. The House bill appears to run squarely into an ever-present problem when the IMF has to come before Congress: it can’t tell the IMF what to do. Members of Congress have long had trouble remembering that the IMF is an international organization that answers to others even though the U.S. funds a lot of what it does. Recent efforts at improved IMF governance have also somewhat lessened U.S. clout at the Fund, although not to the point

that it can go merrily on its way without a U.S. say-so. Still, all the U.S. can do is instruct its executive director to vote against whatever Congress doesn’t like – the approach adopted in the Cornyn amendment.

That the Cornyn amendment appears better drafted only makes it all the deadlier. It’s too soon to say if it will pass in the reform bill or on its own down the road – which, by the way, is closer to the mid-term election and, thus, also deadlier. On the House side, debate will start in earnest when the Administration and FRB come up to defend what they either did or might do to defend the EU financial system against itself. Here, the IMF and the U.S. role in it will come in for merciless drubbing, with the House bill this week just the kick-off to what we expect to be ferocious rhetoric at this hearing and beyond.