The Euro Financial Crisis

[SayOw]

Several countries in Europe are drowning in debt. Their governments have spent more than they take in. Greece is the worst off, living off bailout loans from its European partners and now locked in recession.

But others, including much larger economies like Italy and Spain, are also dangerously indebted. If they go the way of the Greeks, the European single currency project would likely collapse, sparking a massive financial crisis.

Story here.

[SayOw]

A deal has been reached...but bailouts continue. Greece's debt is reduced in half at the expense of bank and bond holders to save the Euro.

[SiteWolf]

This is all just one gigantic game of Monopoly...with the US continually landing on Boardwalk the last few years, while China just keeps on adding hotels everywhere

[P562045]

Now I know that there are some Monopoly sets that use real money. And that is the problem with all of these bailouts or whatever a person wants to call them we are using real money that will eventually run out if we keep going like we have and this has been going on for years if not decades and I am not just talking about us but the rest of the world as well. Well we could start cutting government programs but that has its various consequences as well. And don't think for a second that what is happening in Europe can not happen here as well.

[SayOw]

I think it is just a foreshadowing of what will happen in America.

Unfortunately it likely could be averted but politicians in this country will squabble over how to spend the last dime rather than save it.

[SiteWolf]

When Jockstocks Island is complete, most bills will be payable using Jockbucks

[-mmm-]

Originally Posted by SiteWolf

When Jockstocks Island is complete, most bills will be payable using Jockbucks

/looks at leaderboard

Darn even there Im not in the top 1%

[SayOw]

#OccupyJockstocks

[-mmm-]

Here's a pretty good synopsis of what's going on:

Are the Greeks crazy?

No, they're just at the end of their tether. Europe is asking them to adopt more austerity than they're willing to bear.

Okay, but they're spending too much money. Surely they know they have to cut back?

Sure, but the deals on offer are pretty unattractive. Europe wants to forgive half of Greece's debt and put them on a brutal austerity plan. The problem is that this is unrealistic. Greece would be broke even if all its debt were forgiven, and if their economy tanks they'll be even broker.

But that's the prospect they're being offered: a little bit of debt forgiveness and a lot of austerity.

Well, them's the breaks.

But it puts Greece into a death spiral. They can't pay their debts, so they cut back, which hurts their economy, which makes them even broker, so they cut back some more, rinse and repeat. There's virtually no hope that they'll recover anytime in the near future. It's just endless pain. What they need is total debt forgiveness and lots of aid going forward.

That doesn't sound like a very attractive option for the rest of Europe.

No, it's not.

So maybe they should just let Greece default and wash their hands of them.

Here's the thing, though: Greek debt is largely held by German banks that made the loans. [See update below.] If Greece has been irresponsible, so were the German banks that happily loaned out the money. So if Greece defaults, the banks go kablooey. But they're too big to fail, which means the German government would be forced to bail them out. And guess where the bailout money comes from? Tax dollars.

This means that German taxpayers have a bleak choice. They can shovel lots of money to Greece to keep them from defaulting, or they can refuse, and then shovel lots of money into German banks to keep them from collapsing. Either way, German taxpayers are going to foot the bill. They just haven't quite accepted this in their gut yet, and it's hard to blame them. They're pretty badly screwed no matter what.

Hmmm. Given that choice, they might decide they'd rather give their money to German banks than to Greek civil servants. What happens then?

Greece defaults. And that almost certainly means that Greece exits the euro.

Why?

It's the growth thing again. If Greece defaults, nobody will loan them any money. That means huge cutbacks, which means the economy will tank, which means even more cutbacks, etc. The traditional way out of this spiral is a massive devaluation of your currency. But Greece doesn't have a currency. It has the euro.

So if they want their economy to grow again, they have to (a) default, (b) exit the euro and re-adopt the drachma, and (c) devalue the drachma. This will cause massive amounts of pain, but it will also make Greek exports super cheap, which will eventually revive their economy.

So why not just let that happen?

It's just too catastrophic to consider. German banks, of course, would collapse and have to be bailed out. Ditto for banks in other countries that have lots of exposure to Greek debt. But that's not the worst of it. If Greece exits the euro, it will become terrifyingly obvious that other weak countries might exit too. Portugal, Spain, and Italy are the obvious candidates. Investors, spooked at the thought of their money being stuck in a country that might exit the euro and devalue all its bank deposits, would start huge runs on banks in those countries. The ECB would have to intervene and provide liquidity without limit. It would be a disaster.

So exiting the euro can't be allowed?

Right.

But if there's no exit, there's no devaluation, and Greece is pretty much screwed forever.

Right.

So who wins?

It depends on who blinks. Exiting the euro would be no picnic for Greece. But they could decide it's better than endless indenture, and threaten exit in order to get a better deal from the Germans. Then the Germans have to decide whether to call their bluff.

Wow.

Exactly. Wow. Everyone knows that somebody's going to lose a huge pile of money over this. What's really happening right now is a very high-stakes negotiation to figure out just how the losses are going to be parceled out. Stay tuned.

What a giant clusterfrack

[SayOw]

Another thing the Euro nations are trying to prevent is a "domino" effect... Italy and Spain are also on the brink of bankruptcy and many think if Greece falls, those two nations will follow soon after...

[SayOw]

Your post was a foreshadowing....

Talk about drama. German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou emerged from an emergency meeting on Wednesday evening with a bombshell: Greece will have to decide if it wants to remain in the European monetary union. Merkel and Sarkozy suspended all further bailout funds until that fateful choice is made.

What a shocker. The whole idea of a member of the euro zone bolting the union has been completely taboo, even as a debt crisis has raged through Europe for two years. There isn't even any mechanism in place through which a country can exit the monetary union. The fact that this possibility has even been mentioned is a major break with the past that leaves the future very uncertain.

Full story here.

[SayOw]

Speaking of Italy...

Italian Prime Minister Silvio Berlusconi refused to step down on Friday despite growing desertions from his crumbling center-right coalition in protest over the ruling party's handling of an accelerating economic crisis.

Underlining the foreboding atmosphere, yields on 10-year Italian bonds hit a euro lifetime high of 6.43 percent at one point on Friday, close to levels which led to bailouts of Ireland and Portugal.

Full story here.

[SayOw]

Italian Premier Minister Silvio Berlusconi said for the first time Tuesday that he would resign once parliament approves economic reforms, and Greek politicians said they were close to agreeing on a new government to lead their country through painful cutbacks.

Story here.

[yon Beast]

The UK has imposed new sanctions against Iran which will cut off all financial ties with Iranian banks.

It follows the International Atomic Energy Agency's report on Iran and concerns about its nuclear programme.

From 1500 GMT on Monday, UK credit and financial institutions were required to cease all transactions with banks including the Central Bank of Iran.

Chancellor George Osborne said there was evidence that Iran's banks were funding its nuclear weapons programme.

This is the first time the UK has used powers created under the 2008 Counter-Terrorism Act to cut off a country's banking sector in this way.

http://www.bbc.co.uk/news/uk-politics-15823622