Thursday, February 16, 2012

The Euro Crisis

The current crisis in the Euro Zone is odd because we have never had to contend with a monetary union (at least, of this size) before. Hence, regulators and officials are trying to delay the inevitable and they are successful at doing so because of various mechanisms.
I red this interesting article yesterday which talks of how Iceland was able to begin its path to recovery by defaulting, and simply, this is how entities get past their bad phases... by defaulting or by committing to an accusation, etc. When entities try to tide over difficult times by bluffing and pretending, one eventually faces a ponzi or a scam or a massive shake-up of the system, as was the case with Olympus or the US or China in the near future.
Coming back to Europe, Greece's GDP has reduced by 16% since 2007, unemployment is at 20% (1 out of 5 unemployed officially) and we now have austerity measures which will likely sell stakes in some Greek companies and reduce the wages of government employees. Meanwhile, youngsters who are fresh out of college are confused because they don't know what they did or can do... let's think of the newest batch of graduates who will hit the job floor by May/ June/ September, how are they going to find work when people are cutting back on expenses?
All of this sounds scary but remember, there is a price for everything - I am referring to a floor for this economy's deterioration. By defaulting and moving back to the Drachma, Greece is apologizing and saying that they are going to mend their ways.

Another takeaway from a video I saw on Bloomberg yesterday is that private debt holders will have no recourse in case of Greece because Greece issued debt through Greek law - hence, this can be changed. However, many other nations, such as Portugal, issued debt through UK law which will be nigh impossible to change... the future looks very interesting.
I do have an ethical issue with the use of LTRO because, that would not allow any of the larger nations to default. It is similar to how the US is paying little on its long term debt even though the value of the respective currencies is being destroyed.

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