4 ms·

What specific, concrete events would occur, and why would the occurrence of these events constitute a catastrophe? Why would anyone need to “bail Italy out”? If

What specific, concrete events would occur, and why would the occurrence of these events constitute a catastrophe? Why would anyone need to “bail Italy out”? If they decide not to pay back their debt and start using their own currency, the problem is solved from their perspective. Sure, they’ll have to pay a much higher interest rate if they want to issue further bonds, but so what? Again, please avoid abstract terms when describing this supposed “catastrophe” that would follow a default.

joshuafkon 7y ago
If Italy was to leave the Euro, and pay back their debts in a devalued currency: First it was be a massive deflationary shock to have that debt fall in value (very similar to how mortgage debt falling in value was a shock). Banks in France and Germany would see massive losses. Because of the leveraged nature of sovereign debt in the European banking system it would be extremely deflationary. Secondly, the debt of every other nation in Southern Europe would also be put into question. If Italy is going to devalue, how long before Spain, Portugal, Greece, etc. do as well? And the scale of all this debt is much larger than subprime mortgage debt was. Beyond that - imagine the monetary chaos if nations start to leave the euro and issue their own national currencies again? Will people be hoarding Euros? Selling them? If you look back at the reporting from back in 2010 when the European Sovereign debt crisis was at its peak - you'll see that just about every serious economist agreed that a sovereign debt crisis and the idea of defaults had the potential to be very bad.
- DATACOMMANDER 7y ago
  The only concrete effect you’ve suggested is that French and German banks would lose money. Well, yeah, obviously. So what?
  - joshuafkon 7y ago
    When the assets that banks hold as capital reserves falls in value substantially it's quite bad for the entire economy. See this NYT article from 2011 when the market was worried about Italy: https://www.nytimes.com/2011/11/10/world/europe/euro-fears-spread-to-italy-in-a-widening-debt-crisis.html https://www.nytimes.com/2011/11/10/world/europe/euro-fears-s...
  - DATACOMMANDER 7y ago
    I can’t reply to your last reply for some reason, so I’m replying here. I’ll read the article you linked to, but I don’t expect anything other than more econobabble and fear-mongering. If a country’s entire economic system is based on a stupid assumption—in this case, that a sovereign nation will never default on its debt—then it ought to collapse. Still, I don’t believe that collapse would actually occur. I think that a lot of people would lose a significant amount of money and be quite upset. And then, the next day, the sun would rise, and people wouldn’t be starving in the streets, and life would generally go on.
    - joshuafkon 7y ago
      Hopefully you’re right. But I think if you look at how the people of Greece have already suffered since almost having a sovereign debt crisis you’ll agree the potential is there for it to be quite bad in Italy. https://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html?mtrref=www.google.com&gwh=4DDBD9724BFDA10B3F4DABE72365B654&gwt=pay&assetType=REGIWALL https://www.nytimes.com/interactive/2015/07/09/business/inte...
      - DATACOMMANDER 7y ago
        I’ll read both of those articles later; they’re behind a paywall. I’m not an economist, and I’m open to being shown that I’m wrong, but I still think that if Italy were to default on its debt, there would only be two inevitable consequences: French and German banks would lose a lot of money, and Italy would have serious trouble borrowing at a reasonable rate in the future. I don’t see how anyone could call either of those outcomes “catastrophic” with a straight face. But I can easily see why those who stand to lose a lot of money would want the public to believe that a default would be catastrophic.

joshuafkon 7y ago

If Italy was to leave the Euro, and pay back their debts in a devalued currency: First it was be a massive deflationary shock to have that debt fall in value (very similar to how mortgage debt falling in value was a shock). Banks in France and Germany would see massive losses. Because of the leveraged nature of sovereign debt in the European banking system it would be extremely deflationary. Secondly, the debt of every other nation in Southern Europe would also be put into question. If Italy is going to devalue, how long before Spain, Portugal, Greece, etc. do as well? And the scale of all this debt is much larger than subprime mortgage debt was. Beyond that - imagine the monetary chaos if nations start to leave the euro and issue their own national currencies again? Will people be hoarding Euros? Selling them? If you look back at the reporting from back in 2010 when the European Sovereign debt crisis was at its peak - you'll see that just about every serious economist agreed that a sovereign debt crisis and the idea of defaults had the potential to be very bad.

DATACOMMANDER 7y ago
The only concrete effect you’ve suggested is that French and German banks would lose money. Well, yeah, obviously. So what?
- joshuafkon 7y ago
  When the assets that banks hold as capital reserves falls in value substantially it's quite bad for the entire economy. See this NYT article from 2011 when the market was worried about Italy: https://www.nytimes.com/2011/11/10/world/europe/euro-fears-spread-to-italy-in-a-widening-debt-crisis.html https://www.nytimes.com/2011/11/10/world/europe/euro-fears-s...
- DATACOMMANDER 7y ago
  I can’t reply to your last reply for some reason, so I’m replying here. I’ll read the article you linked to, but I don’t expect anything other than more econobabble and fear-mongering. If a country’s entire economic system is based on a stupid assumption—in this case, that a sovereign nation will never default on its debt—then it ought to collapse. Still, I don’t believe that collapse would actually occur. I think that a lot of people would lose a significant amount of money and be quite upset. And then, the next day, the sun would rise, and people wouldn’t be starving in the streets, and life would generally go on.
  - joshuafkon 7y ago
    Hopefully you’re right. But I think if you look at how the people of Greece have already suffered since almost having a sovereign debt crisis you’ll agree the potential is there for it to be quite bad in Italy. https://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html?mtrref=www.google.com&gwh=4DDBD9724BFDA10B3F4DABE72365B654&gwt=pay&assetType=REGIWALL https://www.nytimes.com/interactive/2015/07/09/business/inte...
    - DATACOMMANDER 7y ago
      I’ll read both of those articles later; they’re behind a paywall. I’m not an economist, and I’m open to being shown that I’m wrong, but I still think that if Italy were to default on its debt, there would only be two inevitable consequences: French and German banks would lose a lot of money, and Italy would have serious trouble borrowing at a reasonable rate in the future. I don’t see how anyone could call either of those outcomes “catastrophic” with a straight face. But I can easily see why those who stand to lose a lot of money would want the public to believe that a default would be catastrophic.