Euro crises!!

afghan said:

Hi every one!!
Hope all are fine and doing well...

Lets start a discussion on the present euro or europian crises,,,

my questions are why, how and when this crises was begun?
what were the policies of different govts in order to tackle down these crises?

With the hope that i may get the scholarly answers from you guys..

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sorry for my bad english!

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Your English is much better than my "economics". I had to move our household to a pay as you go system. I have a simple mind and need to do things in a simple way. That may not work for the European's.

Essentially what happened was that nations of very different fiscal structures and situations (some with massive debts and others with manageable debts) came together under a monetary union with 1 currency, the Euro. Some of the countries with greater debts, like Italy had set up plans to reduce the debt over time and things worked fine when the market for their government bonds was good, but as world credit markets faltered, their rates rose to the point where their plans to reduce the debt no longer worked since they relied on lower borrowing rates vs. what they were paying before joining the Euro. Things have gotten so bad as everything spiraled that investors are asking for more and more return on the bonds which are getting riskier and riskier. This is making it even more expensive to pay off debt- to the point where some couldn't even afford it anymore (i.e. Greece hence the bailout). Now usually a country can inflate their currency to help pay off debts as inflation essentially acts as a tax and since the majority of bond obligations are in nominal terms, not real (so they can just pay back the debts with inflated currency). In this situation, however, there is only 1 currency and while countries like Greece and Italy would benefit from currency devaluation, other countries like Germany and France not only do not need it, but do not want that inflation. Since the latter two have much more power in monetary policy, the PIIGS, the countries that are really in trouble like Greece and Italy, are stuck in a bind where they can't pay off their debts.

I left out quite a few things and this is a simplified account, but it is a basic overview.

Europe invested in maybe a trillion or more of bad mortgage bonds, rated triple a, but esentially junk. They still owe on this. Our banks, ie Goldman, morgan stanley and others have also reloaned countries like Greece and Italy with ridulous terms. It would be in europes best interest to default in full on these loans, unfortunately goldman for one has people everywhere over there, including the head of italy. Top this with trillions of dollars being loaned by the federal reserve, weakening the dollar even more, there is trouble on the horizon.

lars said:

Europe invested in maybe a trillion or more of bad mortgage bonds, rated triple a, but esentially junk. They still owe on this. Our banks, ie Goldman, morgan stanley and others have also reloaned countries like Greece and Italy with ridulous terms. It would be in europes best interest to default in full on these loans, unfortunately goldman for one has people everywhere over there, including the head of italy. Top this with trillions of dollars being loaned by the federal reserve, weakening the dollar even more, there is trouble on the horizon.

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How are you coming to these conclusions? The American mortgage market exposure was not that great for many of the nations. A lot of the debt was accumulated way before and it was the change in the yield curve that really hurt a lot of them.

afghan said:

the things that i got was:

this European crises begun as a result of many countries such as Italy and Greece which were drown in debts and Germany and France was not there to devalue their currency (the currency of Euro or a collective euro country) in order to help those two (debt) countries....

am I right?

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Countries like Greece and Italy were fine when borrowing rates were low. In fact, for years they were working down their debts based on plans they had made when they joined the Euro. When the borrowing costs went up, they hit a problem because it messed up their debt cutting strategies and it led to disaster. The ECB didn't devalue, so they had to rely on fiscal measures, many which have not been very effective.

afghan said:

but now it seems that euro is out of dangers radar. i have a question due to which policies they crack down those crises....

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It is most likely the ECB's recent bank lending plan which they put in place to keep credit markets from freezing up. The central bank offered a tremendous amount of 3 year collateralized loans in which banks could use sovereign debt as collateral. It of course increased demand for sovereign debt and has helped Greece, Italy, etc. Whether it will work over the long run is yet to be seen. I would predict it will not (at least not alone).