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Well...the Greece situation is a horrible state. Damned if you do, damned if you don't. What Greece has done to date is an inordinate amount of spending (financ

Well...the Greece situation is a horrible state. Damned if you do, damned if you don't. What Greece has done to date is an inordinate amount of spending (financed by cheap Euro loans from banks all over the Euro) - think of what caused the credit crisis in America (people spending money they didn't have - by leveraging their house, etc.). Ok...well now those loans are coming due, and Greece has further compounded their problem by essentially lying about the state of their finances. Eurostat (an EU watch dog) recently released a report confirming that Greece has essentially been lying about the bad state of it's finances and revised their budget deficit and debt-to-GDP ratio upwards - http://epp.eurostat.ec.europa.eu/portal/page/portal/publications/collections/news_releases http://epp.eurostat.ec.europa.eu/portal/page/portal/publicat... Then, to add insult to injury Standard & Poors recently downgraded Greece's gov't bond ratings to junk status. That basically means that if they wanted to borrow money from the international capital markets, they would pay much higher interest than say Germany. That was expected though, because news was slowly being released that Greece is in a much worse state than they are letting on. The downgrade just 'solidified' it. Now, in terms of the domino effect, every country in the Eurozone is connected by a number of elements. The eurozone is the largest economic area of cooperation on the planet (geographically). All the countries use the same currency, but not all are controlled by one central bank. Each country has their own individual central bank. But they all share a promise that no one will let any fail, because that invalidates the purpose of the single currency. It would be the equivalent of California going bankrupt. The Federal government will never let that happen, because it would undermine the entire union. Anyway, so the other countries within the Eurozone that have a similar fiscal profile as Greece are Portugal, Italy, Ireland & Spain (also known as the 'PIIGS'). By similar fiscal profile I mean that whatever happens to Greece, something similar will have to happen to the others. So if Greece is allowed to bankrupt, then investors fear the same thing will happen to the others. If Greece is bailed out, then the same will happen to the others. It really is damned if you do, damned if you don't, because if Greece is bailed out - then they are essentially being 'rewarded' for their profligate spending and 'devious' fiscal behavior over the years. But if they don't bail out Greece, the entire Euro will likely collapse. So they have no choice, assuming they want to preserve the Euro. If they bail out Greece though, moral hazard is created because the other countries are essentially given a guarantee that the Euro authorities (and IMF) will not allow them to go bankrupt either. All in all, every countries banks have extended loans to (and bought bonds from) companies, governments, and individuals in other countries. So if the debtor defaults, many banks throughout the EU will have an increasing amount of bad loans on their balance sheet - which could force their governments to bail them out (provided the defaults are big enough). Not only that, but credit will dry further and companies that rely on short-term financing for purchasing inventory and paying employees will go out of business because they can't get access to this financing (i.e. the financial crisis will restart). That will then spread to America, the UK, etc. I know this has been pretty verbose and might be a bit confusing, but I hope that kinda sheds some light on the situation. http://www.reuters.com/article/idUSTRE63Q3FF20100427 http://www.reuters.com/article/idUSTRE63Q3FF20100427 P.S. Oh yes, did I mention that Greeks don't want the bailout and they don't want to do what needs to be done. They are actually rioting - http://online.wsj.com/article/SB10001424052748703961104575225472577513414.html?mod=WSJ_hp_mostpop_read http://online.wsj.com/article/SB1000142405274870396110457522... I am glad I don't live in Greece right now.

CWuestefeld 17y ago
But they all share a promise that no one will let any fail Thanks. This statement is the key that I wasn't aware of.
rdtsc 17y ago
Thank you for writing that. That's why I love HN. That was better explained than most articles I've read so far.
koanarc 17y ago
Excellent comment, one of the most informative so far ITT. I realize that this borders on fortune-telling, but you seem to have a decent grasp on the situation, and you say RE: bailing out Greece that "it really is damned if you do, damned if you don't", so I'd like to ask -- in your personal opinion, what impact do you see this (the impending collapse of the Euro) having internationally over the coming decade? In other words, is this necessarily the beginning of a chain reaction, or is there, in your opinion, some route by which the effects of Greece's economic death rattle may be confined locally? Also, can anyone elaborate on "they all share a promise that no one will let any fail"? Does this 'promise' have a strong legal basis, or is that simply an implied economic obligation in the face of mutually-assured destruction (i.e., as per the California comparison, is leaving Greece out in the cold even an option, legally?)
- marcamillion 17y ago
  koanarc....very interesting questions. Due to the clearly increasing interest in this topic, I am going to write a series of blog posts on the crisis (according to what I know - not claiming to be a fortune teller or a sage of any kind, but it seems people are interested). Well, I wouldn't say the Euro is near collapse just yet. The Obama Administration would never let that happen...i.e. assuming that the Eurozone bigwigs (i.e. Germany, France, etc.) want it to collapse - which I don't see why they would - a collapse of that nature right now would threaten the overall economic recovery. So the powers that be, are doing (and will do) everything in their power to prevent that from happening. In terms of the impact over the long term, i.e. coming decade, I would say that provided that the Euro can get through this it should prove good for the EU. Because the only way they are going to get through it, is if the EU + IMF bailout the problem states. We have already seen the major sacrifices that have been demanded of Greece as a condition for getting the bailout - http://news.bbc.co.uk/1/hi/8656649.stm http://news.bbc.co.uk/1/hi/8656649.stm Although Greeks might be pissed at the 'financiers' for imposing 'harsh' conditions to the bailout, in the long term it will be healthy for Greece. They have to go through a bitter, deep, cleansing period (kind of like the bankruptcy proceeding that GM had to go through to get out of their onerous contracts they had with labor unions & dealer network) to get to a more healthy fiscal position. Unless I am mistaking the resilience of the politicians to weather the storm, I strongly suspect that they will persevere through the political maelstrom and do what needs to be done. Then in 5 - 10 years, we could see some strong growth coming from Greece again - however it all depends on what policies (aside from the austerity measures) they implement. By bailing out Greece and demanding significant austerity measures, they are attempting to contain it locally. The issue is that if they don't take their pound of flesh, the other states/countries will expect the same. So to nip the moral hazard element of it, they (the EU & the IMF) have to be harsh. It's for everybody's own good. In terms of the strong legal basis...I will cover this in my blog post. I believe there is some legal basis for it - but I am drawing a blank right now. I am going to do some research and include it in my post. Stay tuned, will post on HN once I am done. At the very least, even if there isn't an explicit legal basis for the bailouts, there is a strong implied economic obligation - because it is in everybody's best interest to bail out the weakest state. Just like it was in America's best interest to bail out the banks - as annoying as it was to do, with them paying record profits - the alternative would be significantly worse. Emphasis on significantly.

CWuestefeld 17y ago

But they all share a promise that no one will let any fail Thanks. This statement is the key that I wasn't aware of.

rdtsc 17y ago

Thank you for writing that. That's why I love HN. That was better explained than most articles I've read so far.

koanarc 17y ago

Excellent comment, one of the most informative so far ITT. I realize that this borders on fortune-telling, but you seem to have a decent grasp on the situation, and you say RE: bailing out Greece that "it really is damned if you do, damned if you don't", so I'd like to ask -- in your personal opinion, what impact do you see this (the impending collapse of the Euro) having internationally over the coming decade? In other words, is this necessarily the beginning of a chain reaction, or is there, in your opinion, some route by which the effects of Greece's economic death rattle may be confined locally? Also, can anyone elaborate on "they all share a promise that no one will let any fail"? Does this 'promise' have a strong legal basis, or is that simply an implied economic obligation in the face of mutually-assured destruction (i.e., as per the California comparison, is leaving Greece out in the cold even an option, legally?)

marcamillion 17y ago
koanarc....very interesting questions. Due to the clearly increasing interest in this topic, I am going to write a series of blog posts on the crisis (according to what I know - not claiming to be a fortune teller or a sage of any kind, but it seems people are interested). Well, I wouldn't say the Euro is near collapse just yet. The Obama Administration would never let that happen...i.e. assuming that the Eurozone bigwigs (i.e. Germany, France, etc.) want it to collapse - which I don't see why they would - a collapse of that nature right now would threaten the overall economic recovery. So the powers that be, are doing (and will do) everything in their power to prevent that from happening. In terms of the impact over the long term, i.e. coming decade, I would say that provided that the Euro can get through this it should prove good for the EU. Because the only way they are going to get through it, is if the EU + IMF bailout the problem states. We have already seen the major sacrifices that have been demanded of Greece as a condition for getting the bailout - http://news.bbc.co.uk/1/hi/8656649.stm http://news.bbc.co.uk/1/hi/8656649.stm Although Greeks might be pissed at the 'financiers' for imposing 'harsh' conditions to the bailout, in the long term it will be healthy for Greece. They have to go through a bitter, deep, cleansing period (kind of like the bankruptcy proceeding that GM had to go through to get out of their onerous contracts they had with labor unions & dealer network) to get to a more healthy fiscal position. Unless I am mistaking the resilience of the politicians to weather the storm, I strongly suspect that they will persevere through the political maelstrom and do what needs to be done. Then in 5 - 10 years, we could see some strong growth coming from Greece again - however it all depends on what policies (aside from the austerity measures) they implement. By bailing out Greece and demanding significant austerity measures, they are attempting to contain it locally. The issue is that if they don't take their pound of flesh, the other states/countries will expect the same. So to nip the moral hazard element of it, they (the EU & the IMF) have to be harsh. It's for everybody's own good. In terms of the strong legal basis...I will cover this in my blog post. I believe there is some legal basis for it - but I am drawing a blank right now. I am going to do some research and include it in my post. Stay tuned, will post on HN once I am done. At the very least, even if there isn't an explicit legal basis for the bailouts, there is a strong implied economic obligation - because it is in everybody's best interest to bail out the weakest state. Just like it was in America's best interest to bail out the banks - as annoying as it was to do, with them paying record profits - the alternative would be significantly worse. Emphasis on significantly.