3 ms·

This is awesome, thanks! There is one big part I really don't get though. Why would Greece's creditors assume that Germany was going to cover a Greek default,

This is awesome, thanks! There is one big part I really don't get though. Why would Greece's creditors assume that Germany was going to cover a Greek default, just because they are both in the EuroZone? That would be like my bank assuming that the US Government would cover my mortgage if I default, just because it's denominated in dollars. That line of reasoning makes no sense to me. Related to this, the video says: "The problem is, somebody has to pick up the tab, or else every country in the Euro area will suffer." I don't get this either. That would be like saying that me defaulting on my mortgage will make all my neighbors suffer, just because our mortgages are in the same currency. It doesn't seem like a Greek default should hurt anybody but Greece and their creditors.

fredkbloggs 11y ago
Yeah, this. I've never yet seen an explanation for this, in either the MSM or the financial press. There is an assumption everywhere that no one in the eurozone can default. My thinking is that this must have something to do with the ECB's rules on collateral; if the Greek banks have nothing but defaulted securities to offer, then they cannot meet their reserve requirements and therefore cannot obtain euros from the ECB or other banks within the system. That would result in all Greek banks going bust and being unable to operate, unless the Bank of Greece stepped in (by implication, issuing loans to banks in drachma in exchange for defaulted or new public debt securities). But this is speculation on my part; I have never seen the mechanism explained in any detail. Kind of amazing that in 7 years of "crisis" everyone has been happy to parrot the same default == grexit mantra without once explaining the mechanics, but here we are.
- haberman 11y ago
  Yes, the default == grexit line of reasoning is also under-explained, I agree! Maybe an even simpler explanation for that link could be: a Greek default would make their borrowing costs so high that the government simply could not operate without being able to print money and inflate their currency.
afterburner 11y ago
The banks that loaned the money for those "mortgages" are counting on being payed back. If they aren't, they might go bankrupt, causing a financial crisis. Or, they might start lending a lot less, or call in their loans early, putting the squeeze on others, including other banks, causing a financial crisis. And a financial crisis affects everyone. You are nothing to a bank, a bank is huge, and fully expects some people to default on their mortgages. They can take it. However, what if everyone in California defaulted on their mortgages? Then it might cause many banks to fail, cause a financial crisis, and depress the entire US economy, including your neighbours. The monetary union disguised the risk of lending, which was still there.
- haberman 11y ago
  But everything you're saying would apply whether Greece was on the Euro or the Drachma. Yes, an entire country defaulting would screw a lot of creditors, but the risk of default should be priced into the loan/bond terms (interest rate, etc). That's part of the reason investors can make money on bonds, because there is a risk/reward curve they're riding, and the risk is that they won't get their money back. I get the "too big too fail" argument, I just don't get the "monetary union puts us on the hook for our neighbors" part.
  - afterburner 11y ago
    That's funny, your phrasing outlines the paradox: it's a union, yet you don't consider it part of you, but simply a "neighbour" that can be squeezed at will. Monetary unions turn into transfer unions if the regions' productivity are not equal. This is clear from the union of states called the USA. Poor states constantly get federal money taxed from rich states. And there's nothing wrong with that; the whole country benefit from there not being ruined states in the union. Monetary unions also don't work very well without a fiscal union, under which transfers are far more easily arranged...

fredkbloggs 11y ago

Yeah, this. I've never yet seen an explanation for this, in either the MSM or the financial press. There is an assumption everywhere that no one in the eurozone can default. My thinking is that this must have something to do with the ECB's rules on collateral; if the Greek banks have nothing but defaulted securities to offer, then they cannot meet their reserve requirements and therefore cannot obtain euros from the ECB or other banks within the system. That would result in all Greek banks going bust and being unable to operate, unless the Bank of Greece stepped in (by implication, issuing loans to banks in drachma in exchange for defaulted or new public debt securities). But this is speculation on my part; I have never seen the mechanism explained in any detail. Kind of amazing that in 7 years of "crisis" everyone has been happy to parrot the same default == grexit mantra without once explaining the mechanics, but here we are.

haberman 11y ago
Yes, the default == grexit line of reasoning is also under-explained, I agree! Maybe an even simpler explanation for that link could be: a Greek default would make their borrowing costs so high that the government simply could not operate without being able to print money and inflate their currency.

afterburner 11y ago

The banks that loaned the money for those "mortgages" are counting on being payed back. If they aren't, they might go bankrupt, causing a financial crisis. Or, they might start lending a lot less, or call in their loans early, putting the squeeze on others, including other banks, causing a financial crisis. And a financial crisis affects everyone. You are nothing to a bank, a bank is huge, and fully expects some people to default on their mortgages. They can take it. However, what if everyone in California defaulted on their mortgages? Then it might cause many banks to fail, cause a financial crisis, and depress the entire US economy, including your neighbours. The monetary union disguised the risk of lending, which was still there.

haberman 11y ago
But everything you're saying would apply whether Greece was on the Euro or the Drachma. Yes, an entire country defaulting would screw a lot of creditors, but the risk of default should be priced into the loan/bond terms (interest rate, etc). That's part of the reason investors can make money on bonds, because there is a risk/reward curve they're riding, and the risk is that they won't get their money back. I get the "too big too fail" argument, I just don't get the "monetary union puts us on the hook for our neighbors" part.
- afterburner 11y ago
  That's funny, your phrasing outlines the paradox: it's a union, yet you don't consider it part of you, but simply a "neighbour" that can be squeezed at will. Monetary unions turn into transfer unions if the regions' productivity are not equal. This is clear from the union of states called the USA. Poor states constantly get federal money taxed from rich states. And there's nothing wrong with that; the whole country benefit from there not being ruined states in the union. Monetary unions also don't work very well without a fiscal union, under which transfers are far more easily arranged...