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Do you feel confused about the EU Debt Crisis? Or have you just not kept up with it? Not sure what will happen or how to protect yourself and prosper from it? Here s the past 4 months summarized. It s a bit simplified, but not by much: Everything You Need To Know About The EU Debt Crisis And Why It Matters-A Lot
1. Greece needs to pay off about 20-30 Bln in maturing debt between April and May. They don t have it. Spain needs a similar amount in July. Portugal and some others will also need to sell bonds over the coming months. 2. No one wants to pay for Greece and other PIIGS [Portugal, Ireland, Italy, Greece, Spain] mismanagement, corruption, tax dodging, lack of economic dynamism. 3. However, Everyone is rightly petrified of a Greek default, which would probably scare bond markets so badly that none of the other PIIGS (nor about 10 other equally distressed economies in the eastern Europe, the ME, Latin America, etc) will be able to sell bonds at affordable rates. 4. THAT CAUSES: an historically unprecedented wave of sovereign defaults by most or all of these countries. 5. THAT CAUSES higher borrowing costs even for the better economies.
6. THAT CAUSES ANOTHER CREDIT FREEZE UP AND MARKET CRASH, PROBABLY WORSE than in the Fall of 2008 following the mere collapse of Lehman Brothers (one measly big US investment bank), because NOW markets are even more nervous, governments even more debt burdened from the last round of stimulus and bailouts etc. 7. No EU leaders can volunteer taxpayer funds to bailout PIIGS without committing political suicide, because their own economies and taxpayers are struggling and the PIIGS do not evoke much sympathy anyway, having done so much to deserve their fate. Nor can PIIGS leader expect to impose or sustain the draconian spending cuts demanded by the EU over the coming years and expect to survive in power. 8. THEREFORE, the EU and PIIGS leaders best serve their own interests by pretending but failing to achieve a rescue package for Greece, (using the unstated but clear threat of a global economic crash to extract as much cash from the rest of the world as possible) 9. RESULT: Some kind of international coordinated plan that allows EU leaders a chance to save their careers, or at least, reputations: 1. the EU leaders can contribute taxpayer funds to a bailout but tell their electorates they got the best deal they could and made the best of bad situation, paid the least, and avoided a financial collapse (at least for now). 2. The PIIGS leaders can impose painful austerity plans and possibly cede control of their economies to international overseers (demanded by the rescuers to ensure
The comic repetitious cycle of EU support pledges for Greece. They explain: 1. thus transferring blame for the local suffering to international forces beyond their control. As the below chart shows. 2009 was a lull in this storm during which rate resets fell to multi-year lows and took some pressure off of mortgage default rates (which have remained brisk nonetheless). or even loan guarantees. That means a Greek default in April or May makes a Spanish one in July far more likely. but makes perfect sense if the goal is just to pretend to rescue Greece without actually doing so. the near term economic pain would be bad for the careers of the current global political leaders. US Tidal Wave of Mortgage Rates Resets and Defaults In the US. The Twin Debt Bombs Due To Detonate In July The pressure to devise some solution that calms markets is considerable. With the above facts in mind. The IMF is funded internationally. thus they want to avoid that.compliance and repayment of funds contributed). followed by refusals to offer any actual cash. but that won t matter if a Greek default has sent borrowing rates soaring for its fellow PIIGS block members. It is in better shape than Greece. Politicians tend to choose short term benefits over longer term solutions in order to defer painful solutions until after their terms in office. the sudden admission this past week by Germany that the IMF should help save Greece (and by implication. Illogical on the surface. . the recent events become clear. 2. the US sure can. Ramifications There will be intense pressure to get Greece resolved before July. the US being the biggest contributor by far. the other PIIGS). In July: Spain Bond Sale Spain needs to sell about 30 bln in bonds to avoid default. After months of prideful declarations that the EU could solve its own problems. While the long term best solution might be to suffer the consequences of the defaults and begin anew. July 2010 begins a wave of residential mortgage rates resetting higher on scale not seen since late 2008 (scene of our last market meltdown). While EU leaders may not be able to get away with short term painless money printing.
Why is Greece in trouble? Greece has been living beyond its means since even before it joined the euro. Greece was ill-prepared to cope. Former European Central Bank vice-president Lucas Papademos has been named as Greece's interim prime minister. Another summit was called in October in Brussels to solve the crisis once and for all. its income has been hit by widespread tax evasion. It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis . whilst money has flowed out of the government's coffers. made it easier for the country to borrow money. which led to it abandoning the drachma as its currency in favour of the euro in 2002. It has more than 340bn euros of debt . The country has been bailed out twice . about 31. £111bn) international rescue package from the European Commission. Greece and its huge debts have weighed on the eurozone for more than a year. and its rising level of debt has placed a huge strain on the country's economy. . banks being forced to raise more capital to protect themselves against losses resulting from any future defaults.and then in July 2011. The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro.for a country of 11 million people.000 euros per person.and investors still fear a default. following days of negotiations. Public spending soared and public sector wages practically doubled in the past decade. it was earmarked to receive another 109bn euros. His administration will also have to approve a new 130bn-euro ($177bn. He will head an interim government being formed to make sure the debt-strapped country gets its latest bailout payment. The three-point plan includes expanding the single currency's bailout fund to 1tn euros. However. and banks accepting a loss of 50% on money they have lent Greece. When the global financial downturn hit. But that still was not considered enough.Q&A: Greek debt crisis Greece's economic reforms. the European Central Bank (ECB) and the International Monetary Fund (IMF).
leading to fears that their huge economies will need to be bailed out too.French and German banks are large holders of Greek debt. How did we get to this point? The aim of the original Greece bailout was to contain the crisis. worth 109bn euros. That led the leaders of Germany and France. nowhere near big enough to deal with that scenario. the eurozone agreed to expand the EFSF to 1tn euros and got banks to agree to a 50% "haircut" on their Greek holdings. then all of its lenders may be able to demand that the borrower immediately repay them. But bond yields continued to rise on Spanish and Italian debt . as well as the IMF. And so. The eurozone rescue fund . In July this year. in October. If a borrower is in default on any one debt. That did not happen. The failure of Franco-Belgian lender Dexia also added to woes .Default Strictly speaking. for example if a borrower misses a payment. the question of Greece leaving the euro was raised for the first time by angry eurozone leaders. they highlight problems in the eurozone that also apply to other economies.the European Financial Stability Facility . But then Greece's Prime Minister George Papandreou shocked European leaders by calling a referendum on the bailout package. That forced Mr Papandreou to back down over the referendum. . a default occurs when a borrower has broken the terms of a loan or other debt. eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent. Then Greece needed a second bailout. A default can have a number of important implications. Why did the crisis not end with the Greek bailout? Although Greece's troubles are the most extreme. to declare that Athens would not receive its next tranche of emergency aid until the referendum had passed. such as bankruptcy or a debt restructuring. Moreover. The term is also loosely used to mean any situation that makes clear that a borrower can no longer repay its debts in full.was 440bn euros. and he has since made way for a new cross-party unity government that is expected finally to pass the latest bailout deal. Lenders may also be required to write off their losses on the loans they have made. Both Portugal and the Irish Republic needed a bailout too because of their own debts.
This effect could be even worse if Greece also leaves the euro . it would be extremely painful for banks and bondholders. A "disorderly" default could mean much of this debt not being repaid . as well as the German and French leaders at the end of October. Nor can they devalue their currencies to regain a competitive edge. and it is likely some would need nationalising. and therefore less income tax revenue and more benefit payments for the governments.ever. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. . They would need new capital. compounding their financial problems. making the problem worse.government debts as well as household mortgage debts . What's more.Many other southern European countries ran up huge debts . Now the bust has come. these governments cannot rely on their central bank the ECB . and the losses should be manageable for its lenders. as investors fear that other. which sparked a global financial crisis that pushed Europe and the US into deep recessions. Nonetheless. with perhaps $50bn-$60bn outstanding. And the high wage levels leave their economies uncompetitive compared with. What would happen if Greece defaulted? Europe's banks are big holders of Greek debt. The real risk is that a unilateral default by Greece could lead to a financial panic. for example. Because they are inside the euro. it is very hard for them to repay the debts. which leads to higher unemployment. But this is just pushing their economies into recession. Meanwhile they are having to push through very painful spending cuts and tax rises to get their borrowing under control. A crisis of confidence could spark a run on the banks as people withdrew their money. much bigger Eurozone countries may ultimately follow Greece's example. Germany. They also enjoyed rapidly rising wage levels. Greek banks are exposed to the sovereign debts of their country. George Papandreou.during the past 10 years.to lend them the money. Such a move might be a repeat of the collapse of Lehman Brothers.something that was explicitly acknowledged as a possibility by the outgoing Greek Prime Minister. the Greek economy is only a small part of the eurozone. Either way.
as well as a deep recession in the eurozone the UK's main trading partner .4bn worth of Greek sovereign debt. any knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt. When you add in other forms of Greek debt. However.7bn for France. And if it led to a major financial crisis.6bn. which hold $15bn. which is larger.6bn for the UK. compared with banks in Germany. those figures rise to $14. The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member. which hold $22.What does all this mean to the UK? According to figures from the Bank for International Settlements. $34bn for Germany and $56. and France. such as lending to private banks. UK banks hold a relatively small $3.the damage to the UK economy would be substantial. .
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