European debt crisis

Shashikant Kulkarni

This evolved into the European Union (EU) which was established by the Maastricht Treaty in 1993.In 1958. 11 member countries of the EU started using euro as their currency. The European Union introduced the euro on January 1. 1999. On this day. It benefited countries such as . an organization called European Coal and Steel Community was formed.

They borrowed as cheaply . which was economically the best managed country in the EU The rest of Europe.Before these countries started to use the euro as a currency. used Germany' s credit rating to indulge its material desires. they had to borrow money at interest rates much higher than the rates at which a country like Germany borrowed. When these countries started to use the euro they could borrow money at interest rates close to that of Germany. in effect.

So. the governments also started to borrow. currently amounts to around 160 per cent of it’s GDP. if the borrowing rate is 3 per cent while inflation is 4 per cent you're effectively borrowing for 1 per cent less than inflation. This helped . other than the citizens.Also other than the low interest rates. the inflation in the PIIGS countries was higher than the rate of interest.' The debt of Greece.  It means that. And the European peripheral countries (PIIGS) racked up enormous amount of debt in euros. You're being paid to borrow And borrow they did.

The Greek government categorises certain jobs as arduous. pays 70. musicians It means more and more borrowing by the government. even with the fact that Germany is a more productive nation. These jobs have a retirement age of 55 for men and 50 for women. radio announcers. more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers. To get around pay restraints in the calendar year the Greek government simply paid employees a 13th and even 14th monthly salary -months that didn't exist.000 euros in Greece.Take the case of Greece.000 euros in Germany. There is more to come. when they already have so much debt . A job which now pays 55. 'As this is also the moment when the state begins to shovel out generous pensions.

the European Central Bank (ECB). even though the US is six times bigger. Since the start of the financial crisis it (the ECB) has bought. "To put things in perspective. Spain had the biggest housing bubble in the world. and lent another $450 billion or so to various European governments and European banks. Most of these new homes were financed with capital from abroad. something like $80 billion of Greek and Irish and Portuguese government bonds.Take the case of Spain. Spain now has as many unsold homes as the United States. including Greek government bonds . Spain's real estate debt comes to around 50 per cent of its GDP Every time there are default threats. helps out with a bailout. accepting virtually any collateral. outright.

which keeps contributing the ECB rescue fund.‘ But wouldn't it be easier for the German government to just pay the Germa separately. a lot of Germ French banks which have lent m will be in trouble if Greece defa 'The German government gives money to the rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks. In case of Greece. instead of taking this long and convoluted route? .The situation is pretty messy because it is interlinked. Take the case of Germany.

but in Switzerland.5 per cent. except that the difference was much bigger.5 per cent. the banks had started to offer loans and mortgages to their customers in Swiss francs. at 2 per cent. lending to Hungarian borrowers. many of which also had branches in Hungary began to engage in the same business there.5% per cent?‘ . This meant borrowing money was extremely expensive. The same question applied to Hungarians. . may have been lower than in Hungary. they were even lower at around 0. So the Austrian banks.In 2004. interest rates in Hungary were at 12. Rates in Austria. In neighbouring Austria. Why would Austrians borrow at 2 per cent when they could just as easily borrow at 0.

Lithuania and Latvia.Austrian banks have lent 140% of their GDP to countries like Hungary. countries which aspire to have Euro as their currency some day When countries go back to their own currencies to print it and repay debt. Even though Hungary has put in austerity measures and is trying to repay. . the Austrian government wouldn't be able to save the banks and ECB might have to step in Swedish banks have also lent a lot of money to Estonia. if there was a blow up. citizens will be affected.

This will lead to bank runs. This. will lead to a lot of banks collapsing . or will continue using the euro. with all the people queuing up at banks at the same time demanding their money back. of course. So the citizens of the country will try and move their money to either other assets like gold.When a country prints currency in huge quantities. the currency will not remain of any real value.

'Households and firms. . anticipating that domestic deposits would be redenominated into the lira (Italy's currency before it started using the euro). would shift their deposits to other euro-area banks." . this would be the mother of all financial crises. which would then lose value against the euro. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments. leading to a bond market crisis. A system-wide bank run would follow. .Mauldin and Tepper elaborate on this using the example of Italy.' write the authors.

Reference Book: ENDGAME By JOHN MAULDIN And JONATHAN TEPPER eBook Publisher:  John Wiley & Sons Imprint: Wil ey .

com .rediff.Thanks to Shonalee Biswas (European debt crisis: Explained in SIMPLE terms) (My favourite Portal for the last decade) & Many Web sites for the images used in this presentation Shashikant Kulkarni shashi1605@gmail.

Sign up to vote on this title
UsefulNot useful