The year 2008 heralded the start of one of the biggest financial crises ever in the history of mankind, details of which are commonplace now (especially for the thousands of students who graduated that year and the next one. One word summed up all their problems - ' jobs '! ). The second half of 2009 reversed some of the pessimism amongst global economists and toned down the doomsday predictions of the dethroning of the dollar and the death of the global economic order as we know it. (Remember the rebound of the stock market from the depths of 4 digit figures to the current levels?)
However, the crisis it seems is far from over. And obviously we have the Euro drama to blame for it (Not to hard to remember; it is basically everywhere in the news; I guess even India TV might have come up with a conspiracy theory for it by now :D) Here are some quick pointers to the Greek problem for the uninitiated:
1. Greece went on borrowing money from the global markets to facilitate a spending spree during the economic boom era (early 2000s).
2. The borrowings went on increasing and so did the deficit.
3. This mismanagement ultimately led to Greece facing so many problems. As the economy went bonkers after the Lehman fiasco, banks and financial institutions around the world became more careful in issuing credit (Finally they woke up!!!). Greece was viewed as a potential defaulter due to all the debt that it had raked up.
4. Under normal conditions, all Greece had to do would have been to devalue its currency, take some tight measures to cut down on spending , raise taxes etc. But this is not possible because Greece is a part of the European Union, which uses the common currency, Euro. So devaluation is strictly out of question (For beginners : Devaluation basically involves decreasing your currency's value so as to decrease its purchasing power; so automatically things like your imports become expensive. So spending decreases; as a result your deficit will decrease. Greece couldn't do this since the Euro rate is common throughout Europe and can't be controlled by one nation).
5. The EU's strict rules were to prevent any country in this union from raking up such a huge debt. However this has clearly failed and now other countries like Portugal, Spain and possibly Italy with similar debt issues are under the scanner. (The combination of Portugal, Italy, Ireland, Greece and Spain has been called PIIGS by the global media. Nice name, eh?)
In addition to these nations, UK too has come under the scanner.
6. Greece needs the help of other cash-rich countries like Germany to bail it out of this problem. However, initially none of the other EU nations, especially Germany, were ready to monetarily help Greece (If your neighbour did something stupid, why should you pay for it?) In fact, the dithering by Germany in coming to Greece's aid is what is generally regarded as the reason for the problem worsening so much.
7. In the meantime, the lending rates for Greece increased, trust in the bonds issued by the Greek govt. waned (a ' junk' rating given by rating agencies didn't help matters) and questions were being raised about a contagion effect (the possibility of the crisis spreading to other nations).
8. Greece was slowly being viewed as the 'Lehman' of Europe (To quote several newspapers).
9. The EU experiment of having a common currency for all of Europe was slowly being regarded as a failure.
10.The Eurozone announced a Euro 110 bn package to bail Greece out. But global markets, which were already a lot of stress due to the Greek crisis, didn't respond well.
11. As a result, with a bit of prodding from the Obama administration, a $1 trillion rescue package was announced by the EU in association with the International Monetary Fund to prevent the damage from spreading further.
12. However, what the EU and the IMF plan to do is to offer loan guarantees if needed, to struggling economies. At the same time, the European Central Bank agreed to buy lots of govt bonds (which is more debt). So, as many sources have quoted already, this debt crisis is being countered with more debt! Not exactly a smart move.
13. In lieu of these funds, the privileged economies (and atleast for now, all the European nations) will face strict austerity measures to cut down on spending and to stabilize their debt situation. However, Greek citizens have already revolted against such measures, very recently and hence the success of these proposed measures is highly unlikely.
14. At the same time, nations like Germany might find internal resistance to such a package as a lot of people believe it isn't necessary to take upon themselves Greece's burden.
Immediate fallout of the package:
1. Global markets rose on the 11th of May,2010 - one day after this huge package was announced. However the next day markets were back to their jittery selves.
2. Gold prices are surprisingly rising, despite a similar rise in dollar prices. (Normally gold follows a reverse price trend w.r.t the dollar; however this rise is not surprising - more on this in another post)
3. Investors are still flocking towards dollar backed assets, appreciating the dollar's value. (This may hit US exports though. The US is already in deep trouble, but more on that later).
4. Now news of the Chinese government cutting down on real estate prices and making lending dearer has hit the global markets hard and has given them another reason for a free fall. (The Chinese story is a huge one...will cover it soon :D )
All this prompts us to ask a question: Is the global crisis of 2008 really over? Opinions differ. However one thing is for sure.: the road ahead is surely a bumpy one.
However, the crisis it seems is far from over. And obviously we have the Euro drama to blame for it (Not to hard to remember; it is basically everywhere in the news; I guess even India TV might have come up with a conspiracy theory for it by now :D) Here are some quick pointers to the Greek problem for the uninitiated:
1. Greece went on borrowing money from the global markets to facilitate a spending spree during the economic boom era (early 2000s).
2. The borrowings went on increasing and so did the deficit.
3. This mismanagement ultimately led to Greece facing so many problems. As the economy went bonkers after the Lehman fiasco, banks and financial institutions around the world became more careful in issuing credit (Finally they woke up!!!). Greece was viewed as a potential defaulter due to all the debt that it had raked up.
4. Under normal conditions, all Greece had to do would have been to devalue its currency, take some tight measures to cut down on spending , raise taxes etc. But this is not possible because Greece is a part of the European Union, which uses the common currency, Euro. So devaluation is strictly out of question (For beginners : Devaluation basically involves decreasing your currency's value so as to decrease its purchasing power; so automatically things like your imports become expensive. So spending decreases; as a result your deficit will decrease. Greece couldn't do this since the Euro rate is common throughout Europe and can't be controlled by one nation).
5. The EU's strict rules were to prevent any country in this union from raking up such a huge debt. However this has clearly failed and now other countries like Portugal, Spain and possibly Italy with similar debt issues are under the scanner. (The combination of Portugal, Italy, Ireland, Greece and Spain has been called PIIGS by the global media. Nice name, eh?)
In addition to these nations, UK too has come under the scanner.
6. Greece needs the help of other cash-rich countries like Germany to bail it out of this problem. However, initially none of the other EU nations, especially Germany, were ready to monetarily help Greece (If your neighbour did something stupid, why should you pay for it?) In fact, the dithering by Germany in coming to Greece's aid is what is generally regarded as the reason for the problem worsening so much.
7. In the meantime, the lending rates for Greece increased, trust in the bonds issued by the Greek govt. waned (a ' junk' rating given by rating agencies didn't help matters) and questions were being raised about a contagion effect (the possibility of the crisis spreading to other nations).
8. Greece was slowly being viewed as the 'Lehman' of Europe (To quote several newspapers).
9. The EU experiment of having a common currency for all of Europe was slowly being regarded as a failure.
10.The Eurozone announced a Euro 110 bn package to bail Greece out. But global markets, which were already a lot of stress due to the Greek crisis, didn't respond well.
11. As a result, with a bit of prodding from the Obama administration, a $1 trillion rescue package was announced by the EU in association with the International Monetary Fund to prevent the damage from spreading further.
12. However, what the EU and the IMF plan to do is to offer loan guarantees if needed, to struggling economies. At the same time, the European Central Bank agreed to buy lots of govt bonds (which is more debt). So, as many sources have quoted already, this debt crisis is being countered with more debt! Not exactly a smart move.
13. In lieu of these funds, the privileged economies (and atleast for now, all the European nations) will face strict austerity measures to cut down on spending and to stabilize their debt situation. However, Greek citizens have already revolted against such measures, very recently and hence the success of these proposed measures is highly unlikely.
14. At the same time, nations like Germany might find internal resistance to such a package as a lot of people believe it isn't necessary to take upon themselves Greece's burden.
Immediate fallout of the package:
1. Global markets rose on the 11th of May,2010 - one day after this huge package was announced. However the next day markets were back to their jittery selves.
2. Gold prices are surprisingly rising, despite a similar rise in dollar prices. (Normally gold follows a reverse price trend w.r.t the dollar; however this rise is not surprising - more on this in another post)
3. Investors are still flocking towards dollar backed assets, appreciating the dollar's value. (This may hit US exports though. The US is already in deep trouble, but more on that later).
4. Now news of the Chinese government cutting down on real estate prices and making lending dearer has hit the global markets hard and has given them another reason for a free fall. (The Chinese story is a huge one...will cover it soon :D )
All this prompts us to ask a question: Is the global crisis of 2008 really over? Opinions differ. However one thing is for sure.: the road ahead is surely a bumpy one.
2 comments:
A very good read.
keep up the good work.
Hey hari...thank you for the credit...i had just given an idea...u really did the good work wid ur explanation.
I wud like to add a point on--why reverse mortgage is not so popular: the points which u hav mentioned are very true. one of the reasons in why this is not so popular is coz in India there still exists a concept of joint family...and so very few ppl take reverse mortgage. Another reason is that in our country ppl will alws want to keep their property assets for their heirs....
excellent write-up. keep doing the good wrk...best luck
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