Finance and capital markets
Why the Greek situation is scary for Europe as a whole. Created by Sal Khan.
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- At2:46Sal mentions that if Greece takes up the Drachma currency, in effect leaving the euro, the Drachma would be hugely devalued to start with. Why is this so?(29 votes)
- A small point regarding Adonis' comment. Inflation is not necessarily bad. It makes imports more expensive and exports cheaper so it encourages local manufacturing. Also, the savings rate will go down which encourages investment. The problem is if the inflation is too high or unpredictable, because it leads to uncertainty.(14 votes)
- Is there any hope that somehow Greece can pay back their debts if Germany or an other eurozone bails them out?, also if the entire eurozone goes down can't some off the stronger countries just brake off from the euro? if there is already going to be dire consequences and what did Greece do to get themselves in this situation?.(17 votes)
- No because then they would be in even more debt to Germany, France, etc. The larger countries could brake of, but if they do that then the other Euro countries will fall with the loss in GDP in the Eurozone, plugging the global economy down hurting every country including that country. I voted the question up.(7 votes)
- As you see, I asked my dad about this, and he said that, true story, his boss went to Greece two years ago, but when he was there, the coffee shops were full at 10 am during the weekdays. When the people were asked why they weren't at work, they responded that they had government checks for whatever reason. How does that fit in with this?
Edit:One thing I want to know is why the GDP would go down, then, when it should actually force people to work, and at worst do nothing.(7 votes)
- How much money do they spend on social programs? What is the percentage in comparison to other countries?
Also, according to the Greeks I have spoken to, alot of disincentivizing of production was done by EU donors (fishery, agriculture). This resulted in massively decreased production.
Other errors: why does Greece have so many tanks? Why were German and French arms manufacturers selling to Greece when Greece couldn't afford it - not to mention didn't need these arms?
Lastly, alot of the spending was redirected through corruption to politicians private accounts. What about freezing these bank accounts?
How much did the ordinary Greek citizen have to do with getting into this conundrum?(2 votes)
- why is spain not being stressed out? he seemed to not notice it until the end of the video. they have super high unemployment rate, but if im taking this way too seriously, somebody correct me.(4 votes)
- Matt: Since people are unemployed, there is little tax revenue. If there is little tax revenue, there is not much spending, unless Spain borrowed money to spend in order to boost employment until the economy recovers. This would increase their debt over the short term, but over the long term give the chance to lower unemployment, increase tax revenues, reap inflation, and hence control the growth of debt. The reason Spain is not doing this is simple, but difficult to accept for many, as we see our western civilization as the cradle of democracy. You can read on if your heart is not too sensitive;)
The Chinese word for crisis is written with two symbols: one is danger, the other is opportunity. This is quite clever.
The current global financial crisis is, as the Chinese would say, a danger-opportunity. Countries that have been placed in a precarious position as a result of the crisis (danger) can be requested by the more fortunate countries to make concessions in order to receive help (opportunity!). The crisis might be global, but it is also a global opportunity for some.
Spain could borrow money and use that money to repair its economy. Repairing one's own economy would eliminate the danger, but without making concessions it would be a missed opportunity for the lender.
Now you can imagine why the EU Troika and its close supporters (IMF, corporations of the Troika nations, Troika's members' personal associates, etc.) is being so insistent on demanding austerity to the EU countries in a precarious position (danger). Demanding austerity in return for loans gives the Troika an opportunity to exercise leverage on the internal governance of the borrowers. This leverage is an indirect interference with national sovereignty, and hence an act against the countries' democratic institutions and an erosion of the national representative nature of the governments.
The leverage can be used to the benefit of the Troika and its member-allies. This is the nature of the EU of today. Whenever you hear about the European financial crisis, remember how it would sound in Chinese: European financial
To this, let's add a European saying: Cui bono?(18 votes)
- Wouldn't it help the Greek economy if Greece united itself against someone? Declarations of war has saved economies several times before.(4 votes)
- War of some type is a very viable possibility, although it might look different today than in the past. If you look at the increasingly hateful tone of the Greeks to the immigrants who have entered into Europe via Greece, one gets a premonition of this frustration. Greece is far from being alone in these growing anti-immigrant attitudes.(3 votes)
- Matt, from my opinion, Spain is very very close to falling apart like Greece. Horrible politicians, like Zapatero, overspent on civil projects, ruining its economy. Did you know Spain has 22 more times official/state paid vehicles? Every mayor of every town has one. There are way too many autonomic states in Spain that just don't work. Spain is asking for people to buy bonds from them to pay off DEBT that they have. It's a never ending cycle of getting money to spend it on debt.(4 votes)
- Europe is worried about Greece because if Greece defaults on their debt (doesn’t pay their debt) all the investors and banks that are involved with Greece will feel the impact and essentially be affected
If Greece falls apart, it could be sign to other countries that are nearly as worse as Greece such as Portugal that Europe is not able to help the countries that are in trouble and would be in the same condition that Greece is in now.
Also, Greece exiting the Euro would make an impact on the other countries in the zone because then the value of the Euro might go down and other countries that have been lending money will have seen their money disappeared.
Is this all right?(3 votes)
- A lot of what you said is true.
The main problem with Europe is that they have a monetary union, but not a political union. You have a group of countries that can each individually spend and tax however they want, but they can't control their short term interest rates and can't control how much currency is in the system. Printing currency and setting short term interest rates is a very powerful and necessary tool for a country to maintain control over it's finances. Europe doesn't have that. So, each country is similar to the individual states within the USA.(3 votes)
- I'm not sure about the term "Inflate away your liabilities", could anyone help me with this?(2 votes)
- Greece, by law, has certain liabilities to its citizens. The law also states how much the government has to pay. If inflation occurs, then that means that the amount the government has to pay, as prescribed by the law, remains the same, but the real value of what the government pays becomes far less.(4 votes)
- Three days ago newspapers released findings by the German Halle Institute for Economic Research, known as IWH. According to IWH: “Germany benefited substantially from the Greek crisis. The balanced budget in Germany is largely the result of lower interest payments due to the European debt crisis,” IWH.
I have read the same piece of information verbatim in several newspapers but none of them explains how Germany and other countries benefit exactly from their bond rates falling. Can anyone explain how this works? Thanks.(2 votes)
- There are multiple investors in the world (for example, pension funds) who only want to invest in very safe investments. Those investors very often buy government bonds. But since the European crisis these investors started to realize the risk of some government bonds was higher than they first though. So the investors fled from the countries with a low credit rating (like Greece) to the countries with a very high credit rating (like Germany). All of that extra supply of money to Germany made the interest they pay over their bonds drop dramatically. I just looked it up and the interest rate of a 10-year German bond is 0.62%. If the European crisis wouldn't have happened this would be around the 3.62%. This lower interest resulted in lower interest payments. Germany saved about $100 billion this way. The money Germany saves on interest can be used in other ways, like investing in health-care, investing in education or bringing down the governmental debt.
I hope this answered your question.
Given all the data that we`ve explored in the last video and that we have over here, the very high debt to GDP burden that Greece has and the very weak economy, it`s already in a deep recession. It`s especially apparent when you look at its unemployment rate. This is the period October 2010 to March 2012, unemployment rate was already high in 2010 and it`s just been going through the roof, it`s already in the low 20% which is a huge number and even that is understating how bad things are on the ground in Greece because the unemployment is disproportionately affecting the young so if you looked at the unemployment rate for people in their 20`s it would be much much much higher than even this already unbelievably high unemployment rate. And we've already explored that the bond markets are expressing that, by asing for higher and higher interest rates from Greece - these are the long term interest rates in Greece. And so the possible outcomes that we're talking about here -- So this is Greece - --the possible outcomes for Greece-- The only way that they are able to stay in the Eurozone is if someone essentially writes them a huge check, that takes care of a good bit of their debt. So one option is that they get bailed out. They get bailed out by the rest of Europe. And Germany is a major actor here, because they are the largest economy of Europe. But with the bailout, people are saying: "Hey, look, if we are going to write you a big check, you've got to cut some of your excesses, you've got to cut some of your mismanagement." So the bailout packages are all tied to some form of austerity. Now, we've already talked about why austerity is definitely not politically popular in Greece but why it's also - it might just be a scary thing to do. Because you already have an ultra weak economy, you already have the unemployment rate going through the roof, what happens if you get even more austere from where you are now, if you do a drastic cut to government spending from where you are now, this could go to who knows where, to a large degree this rise of unemployment is due to the last few rounds of bailouts and austerity and so that's why the Greek people are getting very suspect of this austerity. But if that doesn't happen, and we've talked about this in the last video, if that doesn't happen, the only viable option for Greece is to go off the Euro. So, leave the Eurozone. The Eurozone is the subset of European union countries that use the Euro as their currency. And we've already talked about this, it would not be a painless process. They would leave the Eurozone, the new currency would be the new Greek drachma and with this it would be probably hugely devalued relative to the Euro so you would have savings wiped out, maybe not fully wiped out, but savings devalued for Greek savers, and they know that already, that's why, because this outcome is looking more and more likely, there is essentially a run on banks in Greece right now. People are going, withdrawing their Euros, so they can stuff them in their mattresses, so they won't be converted in devalued drachmas. But this is having the effect of really weak [..?..] potentially breaking down the banking system. So you could have bank failures. And the whole strategy of leaving the Eurozone, leaving the Euro and going to the drachma, would be to inflate away your liabilities, would be literally to inflate away your debt obligations and your entitlement obligations, but that inflation, and this has definitively happened in the past with countries in this situation, could very easily turn to hyper inflation. And so whether you look at austerity in this reality, where you get bailed out, or you look at this reality over here, in either situation, in the medium term, the economy can really fall apart, it's really not clear how, outside of maybe extra generous bailout, how that can be avoided. And so in that situation, the economy falls apart. And when economy falls apart, in a big way, and you have major unemployment, it is a scary thing, it can lead to social unrest. And I'm not talking about 8%, 9% or 10% of uneployment rate like we have in US, we are talking about 20%, 30%, 40% unemployment rate, even higher in the folks that are likely to be unrestful socially, which is the young people, so this could lead to social unrest, and even radicalization, when people start worrying about whether they get food on the table and they don't have a job, they might start supporting people who have more radical views. So just that by itself, is very, very scary proposition. The history of Europe tells us that even if relatively small countries in Europe fall apart in this way, it could have repercussions in the rest of Europe. This is how the World War I and World War II got started. Just that reason alone is reason enough for people to think very seriously about bailing Greece out. And it doesn't come without moral consequences, the counter-argument is - if we bailed them out doesn't this reward mismanagement and overspending? And even a little bit of shady accounting on their national economic statistics. So, there's a very good reason, if you are a German tax payer, then you are very suspicious of these bailouts. Why we are keep running the cheques to the Greeks if they are not willing to take some pain? Now the Greek side of it, they say "Look, we've already taken amount of pain, we are already kind of on the brink, possibly across the brink, if you force even more pain on us, then we are going to be in really, our society is at the risk of falling apart. So, we are in a desperate situation. This is not a time to kind of force a moral point on us." So that by itself is a reason why people are worried but then there is even a bigger reason that Greece might not be the only, it's only the first, maybe the worst, of the situations but if Greece falls apart, and especially if the Eurozone - or, I should say, the European Union or Europe - is not able to bail out Greece that's an implicit signal to the rest of world that Europe is not able to essentially bail out its countries. So, you see on this chart right over here, Greece is not alone, it is definitely the worst, but right behind it, you have Portugal. And its debt, you have long-term debt with interest rates looks like around the 12 or 13% range. Portugal has a 93% debt to GDP ratio and already has very high unemployment rate. If Greece is allowed to leave Eurozone and does not get bailed out, investors are going to start wondering "Well, hey, maybe Portugal is not going to get bailed out". This going to make people expect more interest from Portugal in order to lend them money, and they need money in order to continue operating in the way they are operating, but every increase in a percentage point, right over here, is going to really eat into Portuguese GDP and kind of force them down its debt spiral. Their debt as percentage of their GDP is almost 100% if they have to pay an extra one percent on that, that 1% is going to eat into their GDP and it is going to force Portugal, the economy to slow down even more and make it even more and more onerous and they would just kind of go in the same direction as Greece. And once again, Portugal is not alone, Italy has a very high debt to GDP, Ireland - very high debt to GDP ratio, Spain has a very high unemployment rate. So, the fear here - and I guess there are two major fears - one is that Greece by itself can become a point of instability in Europe, but the second fear, if this thing isn't solved, that this could cause a kind of contagion or a chain reaction through Europe, that people start getting freaked out, they start wanting to not lend to these countries, that becomes a self-fulfilling prophecy, they might also have to leave the Eurozone.