Why Europe is worried about Greece Why the Greek situation is scary for Europe as a whole
Why Europe is worried about Greece
- Given all the data that we`ve explored in the last video
- and that we have over here, the very high debt to GDP burden that Greece has and
- the very weak economy, it`s already in a deep recession.
- It`s especially apparent when you look at its unemployment rate.
- This is the period October 2010 to March 2012, unemployment rate was already high
- in 2010 and it`s just been going through the roof, it`s already in the low 20%
- which is a huge number and even that is understating how bad things are on the ground in Greece
- because the unemployment is disproportionately affecting the young
- so if you looked at the unemployment rate for people in their 20`s
- it would be much much much higher than even this already unbelievably high unemployment rate.
- And we've already explored that the bond markets are expressing that, by asing for higher and higher
- interest rates from Greece - these are the long term interest rates in Greece.
- And so the possible outcomes that we're talking about here --
- So this is Greece -
- --the possible outcomes for Greece--
- The only way that they are able to stay in the Eurozone
- is if someone essentially writes them a huge check, that takes care of a good bit of their debt.
- So one option is that they get bailed out. They get bailed out by the rest of Europe.
- And Germany is a major actor here, because they are the largest economy of Europe.
- But with the bailout, people are saying: "Hey, look, if we are going to write you a
- big check, you've got to cut some of your excesses, you've got to cut some of your mismanagement."
- So the bailout packages are all tied to some form of austerity.
- Now, we've already talked about why austerity is definitely not politically popular in Greece
- but why it's also - it might just be a scary thing to do.
- Because you already have an ultra weak economy,
- you already have the unemployment rate going through the roof,
- what happens if you get even more austere from where you are now,
- if you do a drastic cut to government spending from where you are now,
- this could go to who knows where, to a large degree
- this rise of unemployment is due to the last few rounds of bailouts and austerity
- and so that's why the Greek people are getting very suspect of this austerity.
- But if that doesn't happen, and we've talked about this in the last video,
- if that doesn't happen, the only viable option for Greece
- is to go off the Euro.
- So, leave the Eurozone.
- The Eurozone is the subset of European union countries that use the Euro as their currency.
- And we've already talked about this, it would not be a painless process.
- They would leave the Eurozone, the new currency would be the new Greek drachma
- and with this it would be probably hugely devalued relative to the Euro
- so you would have savings wiped out,
- maybe not fully wiped out, but savings devalued for Greek savers,
- and they know that already, that's why, because this outcome is looking more and more likely,
- there is essentially a run on banks in Greece right now.
- People are going, withdrawing their Euros, so they can stuff them in their mattresses,
- so they won't be converted in devalued drachmas.
- But this is having the effect of really weak [..?..]
- potentially breaking down the banking system.
- So you could have bank failures.
- And the whole strategy of leaving the Eurozone,
- leaving the Euro and going to the drachma,
- would be to inflate away your liabilities,
- would be literally to inflate away your debt obligations and your entitlement obligations,
- but that inflation, and this has definitively happened in the past with countries in this situation,
- could very easily turn to hyper inflation.
- And so whether you look at austerity in this reality, where you get bailed out,
- or you look at this reality over here,
- in either situation, in the medium term, the economy can really fall apart,
- it's really not clear how, outside of maybe extra generous bailout,
- how that can be avoided.
- And so in that situation, the economy falls apart.
- And when economy falls apart, in a big way,
- and you have major unemployment, it is a scary thing,
- it can lead to social unrest.
- And I'm not talking about 8%, 9% or 10% of uneployment rate like we have in US,
- we are talking about 20%, 30%, 40% unemployment rate, even higher
- in the folks that are likely to be unrestful socially,
- which is the young people, so this could lead to social unrest,
- and even radicalization, when people start worrying about whether they get
- food on the table and they don't have a job,
- they might start supporting people who have more radical views.
- So just that by itself, is very, very scary proposition.
- The history of Europe tells us that even if relatively small countries in Europe
- fall apart in this way, it could have repercussions in the rest of Europe.
- This is how the World War I and World War II got started.
- Just that reason alone is reason enough for people to think very seriously about bailing Greece out.
- And it doesn't come without moral consequences,
- the counter-argument is - if we bailed them out
- doesn't this reward mismanagement and overspending?
- And even a little bit of shady accounting on their national economic statistics.
- So, there's a very good reason, if you are a German tax payer,
- then you are very suspicious of these bailouts.
- Why we are keep running the cheques to the Greeks
- if they are not willing to take some pain?
- Now the Greek side of it, they say "Look, we've already taken amount of pain,
- we are already kind of on the brink, possibly across the brink,
- if you force even more pain on us,
- then we are going to be in really, our society
- is at the risk of falling apart. So, we are in a desperate situation.
- This is not a time to kind of force a moral point on us."
- So that by itself is a reason why people are worried
- but then there is even a bigger reason
- that Greece might not be the only,
- it's only the first, maybe the worst, of the situations
- but if Greece falls apart, and especially if the Eurozone - or, I should say, the European Union or Europe - is not able to bail out Greece
- that's an implicit signal to the rest of world
- that Europe is not able to essentially bail out its countries.
- So, you see on this chart right over here,
- Greece is not alone, it is definitely the worst,
- but right behind it, you have Portugal.
- And its debt, you have long-term debt with interest rates
- looks like around the 12 or 13% range.
- Portugal has a 93% debt to GDP ratio and already has very high unemployment rate.
- If Greece is allowed to leave Eurozone and does not get bailed out,
- investors are going to start wondering
- "Well, hey, maybe Portugal is not going to get bailed out".
- This going to make people expect more interest from Portugal
- in order to lend them money, and they need money
- in order to continue operating in the way they are operating,
- but every increase in a percentage point, right over here,
- is going to really eat into Portuguese GDP and kind of force them down its debt spiral.
- Their debt as percentage of their GDP is almost 100%
- if they have to pay an extra one percent on that,
- that 1% is going to eat into their GDP
- and it is going to force Portugal, the economy to slow down even more
- and make it even more and more onerous
- and they would just kind of go in the same direction as Greece.
- And once again, Portugal is not alone, Italy has a very high debt to GDP,
- Ireland - very high debt to GDP ratio,
- Spain has a very high unemployment rate.
- So, the fear here - and I guess there are two major fears -
- one is that Greece by itself can become a point of instability in Europe,
- but the second fear, if this thing isn't solved,
- that this could cause a kind of contagion or a chain reaction through Europe,
- that people start getting freaked out, they start wanting to not lend to these countries,
- that becomes a self-fulfilling prophecy,
- they might also have to leave the Eurozone.
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