SOME QUESTIONS RAISED BY THE GREEK AFFAIR 2010 Implications for the EU.

SOME QUESTIONS RAISED BY THE GREEK AFFAIR 2010Implications for the EU

CENTRAL ISSUE

The development of a common currency usually follows a political union, not the other way round.

If you have a common currency, you have to ensure that everyone plays by the same rules.

There are rules, and Germany joined the Euro Zone, only after the No-Bail-Out clause was inserted, and now it is bailing Greece out.

Now it is part of the Bail-Out of over 150 billion Euros, and is making the largest contribution.

EU setting up a Stabilization Fund to cope with future problems.

Eurozone Slovakia now in EZ

Countries not in, or pegged to, the EZ

Countries using the Euro, but not in the Eurozone.

CAUSES

Greece was sheltered by the low interest rates of the Euro, whose strength was assured by other countries.

Greece ignored the rules and was involved in some shady dealings with Goldman-Sachs to get around the rules.

Thus, it ran up a huge budget deficit and its debt is more than 100% of GDP (but other countries, such as Japan and UK in same position).

However, Greece does not have the money to pay the interest on its loans (like Mexico in 1990s)

The real problem at the moment is that the Greek government does not have the funds to make the scheduled payments on its debts, in which case it would default. Already Greek bonds have been declared “Junk.” It spends too much and collects too little, and has covered this by borrowing. But the current crisis is an inability to pay interest on the loans.

This is the limit allowed by the EU to members of the Eurozone.

Where were the EU regulators during this period?

CAUSES 2.

The known inability to pay raises the cost of borrowing to the Greek government, thus increasing its debt.

Treasury Bonds have risen to 12% Nobody wants to lend to a country with these

uncertainties. The value of Greek Bonds reduced to “Junk”

status internationally. Germans hold a lot of Greek debt, and so

they want to see their money back.

Real figure, May 10, is 12%, not 6.5 which is the highest on this graph which ends in Feb 2010

The scale shows the rate of interest Greece must pay to borrow money.

IMPLICATIONS

There are two fears behind this problem in the European currency region.

That the terms needed to bail-out Greece will lead to political instability and an inability of the Greek government to govern. This will lead to a general decline in the confidence in the Euro zone.

Greek government has to introduce heavy austerity measures demanded by IMF and EU.

There are other countries in similar positions, though not facing default on debt payments yet, such as Spain, Ireland and Portugal.

IMPLICATIONS 2 The second concern is that the strong countries

of the Eurozone are being asked to bail-out those countries that have seriously mis-managed their economies.

This could provide a “safety-net” encouraging other countries to be as reckless, since someone will always come to their rescue.

To counter this, the lenders have to demand very strong action from the Greek government to close the budget deficit so it will be able to pay in future.

This is a loan-guarantee fund to allow Greece not to default at present. They will have to pay back.

IMPLICATIONS 2

Could this lead to a break-up of the EU or the Euro?

Very difficult to disentangle countries from the common currency.

No ability to devalue local currencies, because they don’t have local currencies any more (except UK)

Drive down the value of the Euro against the $, but this could be good, since many think the Euro is overvalued.

Must rebuild confidence in the system.

CONCLUSION

The terms of the bail-out not agreed yet (May 2010)

IMF is involved, which is humiliating to the EU

Should have taken action earlier, rather than discussing whether Greece should take all the blame for their actions. They can’t because of the Euro.

Testing the identity of Europe as a concept. How do you make sure the Greeks play by

the rules this time?

graphEURAmerican Dollarbase currency