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Thread: Greek crisis

  1. #1
    Senior Member Bamboo's Avatar
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    Default Greek crisis

    I'm ignorant about this entire issue. I have no idea why this is happening at all.

    So I set out to learn.


    I found this article helpful, even if it is out of date:

    Greek debt crisis timeline

    In addition, I'm reading these:

    European Central Bank

    History of the European Union


    What other resources are there to help me understand the economic issues in Europe and the rest of the world? What else should I know?

    What I really wonder is: where do I start? There is so much information on the current events and fiscal policy and theory I don't know where to begin.
    Don't know how much it'll bend til it breaks.

  2. #2
    pathwise dependent FDG's Avatar
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    The timeline article is pretty good, IMHO.

    Greece falsified its budget data, thus the sudden spike in debt-to-GDP ratio transferred to a shock in its bond prices. Thus it's been forced to ask for help becase the state's cash flows aren't strong enough to pay extremely high interest rates, which would have to be paid if greece were to access the long-term bond market.

    It's a small country with extremely high tax evasion and a relatively small industrial sector; in a currency board, it's bound to have strong trade imbalances towards other euro-partners because it has to import most goods - plus, since there's a lack of natural resources, labor productivity is low and imports are cheaper.

    So it's a issue which can't be easily solved, greeks will have to take up debt to buy products from other euro-nations which, in turn, will keep on financing greece (portugal issues are similar).

    Austerity measures will only make it worse, especially in the short term: slashing govt expenditure and raising taxes to pay interest on foreign-held debt will result in a decrease of GDP, thus an increse of Debt-to-GDP ratio.

    This crisis can affect banks that held/hold high amounts of Greek debt (primarly French and German), for a simple reason: if it's marked-to-market (i.e. its value changes with the prices quoted), then the value of those banks' asset will strongly decrease, thus there will be an unbalance in the assets-to-liabilities ratio. Thus they will be forced to raise capital, which means that their return on equity (profit over equity) will lower and they'll be comparatively considered a worse investment. This situation can turn into a negative spiral (for this reason, mark-to-market has currently been halted).

    How can this affect the american economy? Well, if some german and french banks were to fail, american banks that hold either bonds or stocks connected to whatever has failed will have to write down their assets, thus raise capital, thus become less competitive and etc. etc.

    that'd be a big hit to the financial system, since if banks are trying to raise capital they'll have less resources to extend loans to both businesses and households, thus the economy will be more likely to slow down, etc.


    Anyway, since it's "work in progress", there aren't many great resources around IMHO.
    ENTj 7-3-8 sx/sp

  3. #3
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    Austerity measures should have been taken years ago, but democratic politicians have short time horizons. That said, the crisis has been hastened by the European Central Bank. Monetary policy is tight for countries on the periphery of the Euro, like the Republic of Ireland and Greece. This has reduced GDP in those countries and made it more difficult for governments to service debt. In other words, the Eurozone may not be an optimal currency area, and countries like Greece are currently finding out what that means.
    A criticism that can be brought against everything ought not to be brought against anything.

  4. #4
    Senior Member Bamboo's Avatar
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    Thanks for your replies. I've been putting off boning up on understanding domestic and international economic issues, but now that I'm getting into it, it's not all that bad. However, I don't have a complete understanding of this yet, so I'll put off my thoughts on austerity measures et al.



    Also, the ECB has a bunch of official online publications that look good, but I haven't read them.

    http://www.ecb.int/pub/html/index.en.html

    These are straight from the horses mouth, which is both a good thing and potentially a bad (or misleading) thing. Of course, I doubt they will take any sort of stance on any issue in this format. But considering I now know a little more than nothing, they should provide some more insight.
    Don't know how much it'll bend til it breaks.

  5. #5
    pathwise dependent FDG's Avatar
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    The ECB is a pretty good, independent source, IMHO - even when there's a potential conflict of interest. Its papers are a bit technical though, they might be difficult to understand for someone not used to economics' jargon.

    That said, the crisis has been hastened by the European Central Bank. Monetary policy is tight for countries on the periphery of the Euro, like the Republic of Ireland and Greece.
    Well it's only tight compared to the US policy, plus the ECB mandate does not entail fighting unemployment and promoting growth - its only aim should be to fight inflation.
    ENTj 7-3-8 sx/sp

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    Quote Originally Posted by FDG View Post
    Well it's only tight compared to the US policy, plus the ECB mandate does not entail fighting unemployment and promoting growth - its only aim should be to fight inflation.
    I was using the phrase "tight monetary policy" somewhat idiosyncratically. I tend to think of the looseness of monetary policy in terms of the supply of and demand for money. By that measure, both the Federal Reserve and the European Central Bank have tightened monetary policy over the last few years. There is an excess demand for money across most of the world. Part of the problem for a country like Greece is that it needs looser monetary policy than countries like France and Germany.
    A criticism that can be brought against everything ought not to be brought against anything.

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    The situation is very similar to what happens when you lend money to an irresponsible acquaintance who keeps demanding more. If you comply, you sink deeper in the hole. If you refuse, he will likely get pissed off and refuse to pay back any of it. So you continue in order to stay on his good side and hope that one day he will have enough money to pay you back.

    Germany wanted to demand greater austerity from Greece, but were pressured to give in. This does not solve the problem. It only defer the issue a few years. We might have an unfixable financial crisis in a couple of years

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