Archive for March, 2015

Debt to GDP Ratios Since the Financial Crisis

Saturday, March 14th, 2015

I found this short article and it kinda reminded me of what we said about Greece being the tip of the iceberg with regards to the Euro zone. However, this article only briefly mentions Greece and looks at debt since the Financial Crisis. It was interesting to see how global debt to GDP has increased since the Financial Crisis. Even more intriguing was how much China’s debt to GDP ratio has gone up in comparison with both the U.S. and Germany.

http://www.theguardian.com/news/datablog/2015/feb/05/global-debt-has-grown-by-57-trillion-in-seven-years-following-the-financial-crisis

Greek Doom Scenario’s So Bad It May Keep the Euro Intact

Friday, March 13th, 2015

Saw this article and thought it was interesting given what we’ve talked about today and earlier this week.

Seems like no one wins if Greece goes…

http://www.bloomberg.com/news/articles/2015-03-13/roubini-greek-doom-scenario-s-so-bad-it-may-keep-the-euro-intact

What a Grexit Would Look Like

Thursday, March 12th, 2015

Following Wednesday’s discussion on the feasibility of a country’s withdrawal from the Eurozone and the lack of a conclusive answer, I did some research on what a Greek Euro Exit, or Grexit would look like. In an article cheerily titled “Doomsday for the Euro Area: Causes, Variants, and Consequences of Breakup” the authors outline what the economic impacts of a weak country’s exit and a strong country’s exit would look like. Weak countries would be likely to secede in order to regain individual control of monetary policy.

Here’s what you need to know:

1) Withdrawal from the Eurozone would likely mean the end of membership in the European Union: exit violates the Treaty of Maastricht, the Treaty of Lisbon, and the Treaty of Rome. Remaining member countries would probably erect trade barriers and impose tariffs.

2) In both the strong and weak country cases, the costs of exiting the Eurozone (and exit from the European Union would likely follow) likely outweigh the costs of remaining in the Eurozone.

In the case of a weak country (defined as a country undergoing financial distress), the government would have to institute protectionist measures to prevent capital flight and prevent the collapse of its banking system.

  • The redenomination of sovereign debts in the reinstated national currency would likely be viewed as a default by investors and credit ratings agencies. Fiscal shortfalls would be worsened because the country’s  budget balance on net would still be in deficit.
    • In order to give the new currency a sense of reality, the government would have to instantly redenominate all bank deposits in the new currency. To prevent deposit holders from draining the banking system, the government may have to put a ceiling on daily cash withdrawals (no more liquidity from the ECB) and implement restrictions on foreign travels. As soon as deposit holders suspect the country is considering leaving the euro, they’ll try to send money to safe havens.
  • The external value of a weak country’s currency post-secession could fall up to 60%.
  • The weak country couldn’t even expect to regain competitiveness. Think of the J-curve – a country like Greece that engaged in excessive consumer spending won’t immediately have anything to export or might not even be able to transition its firms to export-orientation quickly enough to recover.
  • Ultimately, weak countries are dependent on credit from other countries in the euro area. After these flows are cut off, the government will have to deflate its economy. Less economic activity means less tax revenue and higher budget deficits. To support these deficits, the government would have to implement a domestic austerity program or print more money to create higher inflation, which would tank the value of its domestic savings.

Report from the Politics Committee

Tuesday, March 10th, 2015

Political Aspects of the Euro

“Europe’s QE Quandary”

Monday, March 9th, 2015

Short overview of why Quantitative Easing is taking place in the EU.

http://www.bloombergview.com/quicktake/europes-qe-quandary

A question for the political people: Why QE?

Sunday, March 8th, 2015

Dr. Greenlaw posed a very good question (that I couldn’t answer) regarding quantitative easing (QE). Here is a review of what I talked about yesterday regarding monetary policy:

Closed Market: One method of increasing aggregate demand is through expansionary monetary policy. The central bank injects more money into the economy by purchasing bonds from financial institutions. An increase in the money supply results in a decrease in interest rates. The central bank hopes that lower interest rates will influence the spending decisions of firms and households; individuals will have more of an incentive to borrow and spend this money on goods and services and therefore increase aggregate demand.

Open Market: The effects of a monetary injection within the economy are mitigated in an open market. Lower interest rates cause investors to look elsewhere for a higher rate of return on their investments. As a result, money leaves the economy and causes the currency to depreciate. The euro is on a dirty-float system, meaning that the ECB will step in to prevent large fluctuations in the value of the currency. Intervention will involve the ECB selling foreign currency reserves to buy back the euro to prevent further depreciation. The money that was originally injected into the market will be taken out of circulation.

When a country joins the Euro Zone, it gives up the ability to control the economy through monetary policy. The European Central Bank is then in charge of controlling interest rates and the money supply for the zone as a whole. Knowing what effect monetary injections have in an open market system leads to the question: Why is the ECB pursuing/going through with quantitative easing? Does anyone have an answer?