Greek Financial Crisis (part 2) What Greece could have done if it had its own currency
Greek Financial Crisis (part 2)
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- So let's review the situation that has been emerging in Greece
- and then dig a little bit deeper as to their options.
- So as we saw in the last video, Greece was spending
- a lot more then it was bringing in tax revenues.
- So it was running these deficits, and year after year
- these deficits were piling up and the national debt was increasing.
- And to make matters worse, Greece actually tried to cover this up
- for many years with some accounting shenanigans,
- because there were some European Central Bank rules about how much debt you could take on.
- So it was trying to not trigger those rules while still being able to
- take on more debt, so that it could fund this spending.
- But then, in the last few years it became clear,
- the shenanigans were cleared up. And when they were cleared up;
- one, it made people realize, wow, that was kinda shady what they did
- and on top that, they had a much larger government public debt burden then people thought.
- And the combination of the two, that the country was trying to not make its obligations
- apparent and to be transparent to the market,
- and on top of that, that this debt burden was so huge.
- It made people wary of whether the country would actually be able
- to fulfill its obligations. So trust,
- investor trust, when I talk about investors, I'm taking about the people
- who would invest in Greek bonds. So essentially, the lenders to Greece.
- Their trust went down, and they expected higher interest.
- Higher interest from the Greek Government, and that made things worse.
- Now not only they had to keep spending on all their entitlements,
- but now the cost of funding that existing debt that they already had
- and the new debt that they had to do to keep spending at that rate,
- the cost of that debt itself went up.
- And that only kinda added fuel to this balloning debt problem.
- Now in the last video, we explored a couple of options.
- In particular, we said what about austerity?
- What about the situation where you just really, mainly you could
- try to increase your revenue or slah spending, but people really try to focus on the spending side.
- What if really just slashed the spending,
- in a very severe way? Realy jist cut straight to the bone.
- Well, there's a couple of problems there.
- One problem was that it is not popular at all
- and then the bigger problem was that you are already in the recession,
- and this could make the recession even more severe
- ...recession more severe...
- Frankly, it was not popular, it is never popular
- but as we move now, in 2012, is even less popular
- because Greece has already gone through couple of rounds of this austerity,
- This is not a new problem, they´ve been bailed out in small ways,
- and I´ll talk more about what a bail out is,
- as part of that package, people who were bailing them out
- said, look if we´are going to give you something
- if we are going to use some of our tax payers money to help you out,
- you´ve got to cut your spending. But what is happening in every round of austerity so far,
- is that it helps slow the economy even further.
- The recession kept deepening and deepening and it kind of common sence that it would,
- if government stops spending in a big way, it slows down already slow economy.
- The other thing you might be saying is - why doesn't Greece just stop paying its debt?
- Why doesn´t it just default on its debt?
- So like, sorry investors that you have to take a loss here but we just not paying anymore.
- Well, the problem is that it has a situation when spending more than it is bringing in
- and its obligations are all in the euro.
- It does not have its own currency. And so, if they would be on default on their debt,
- obviously the people who lended them money would be very upset,
- and there is not way they are going to lend more money to Greece.
- And if they do not lend more euros to Greece,
- Greece is not going to be able to continue spending euros the way it has.
- it is promising all of their pensions, retirees, unemployment insurance,..
- it is paying all these obligations in euros
- and if they default, they are not going to be able borrow more euros to do those obligations
- and once again, it will be kind of very fast and violent austerity
- because there wouldn't be even the money to fund
- and you would have this kind of drastic,..almost shut down of the government.
- So, this right over here is not a good option.
- Now, to start exploring the third option
- and this is kind of the option it seems likely that Greece might have to going.
- Let´s think about what Greece could have done
- if it had monetary independence. If it had it´s own currency.
- Just remember, this is completely hypothetical,
- Greece did have its own currency, the drachma, before it joined the euro,
- but let's think about what it could have done in this situation
- if it actually did have its own currency.
- It is not cut-and-dry here because Greece was
- actualy able to historically borrowed at very cheap rates,
- because it was part of this EuroZone. But let's just think about it
- if it wasn't the situation, what it could of done if had its own central bank.
- So this is some of our stats from our last video,
- and if it has its own central bank, let me make this very clear,
- this is all hypothetical, Greece does have no its own central bank right now,
- for all of the Eurozone countries, the euro is printed by the European central bank,
- it is not by anyone country. But - hypothetically, let's say
- Greece does has its own central bank. So, Greek central bank...
- that prints its own, let's call new drachma.
- And so that Greek Central bank in this type of the situation
- could just start printing drachma and essentially
- use that drachma to buy government bonds
- so essentially printing that money and buy government bonds
- it is lending it to the government. It lends to the government
- so that the government could spend on its entitlements, on all of its various obligations.
- Now, that may seen very convinient, essentially one part of the government
- or something associated with the government, prints money,
- essentially lends it to the government, funds its obligations
- but the immediate thing you may say is "well, hey..
- ..if you just print currency like this, willy-nilly,
- won't this lead to an inflation?" And the simple answer is, it probably will.
- But that actually might be the solution, if you are in conundrum like Greece is in.
- First of all, inflation might not be so bad,
- Right now the country is in a deep recession, so there
- is all the extra capacity, you might even have a little bit
- of price cushion. And just in general the inflation rates
- aren't ultra dramatic, there are not super low but not
- super high either, so there might be some.. you may not have to worry
- about kind of hyper-inflationary situation, but on top of that
- the government probably wants a respectable amount
- of inflation, might not want 100% or 1000% of inflation
- but it might like 10%, 20% or 30% yearly inflation.
- And to think about that, think about the idea, in this hypothetical Greece,
- all of its obligations wouldn't be in euro, its obligations
- would be in drachma. And so, you can imagine a world,
- let's think about hypothetical Greece and I'm going to use
- hypothetical numbers, just to make things more simple
- to understand or to do in our heads, let's take this hypothetical Greece,
- but it could be Greece or any other country, and let's say it has a GDP ...
- ...GDP of 100, let's call it 100 of its currency, ...100 drachma is its GDP,
- and let's say it has its entitlement obligations,..and this is all on the annual basis,..
- ...and let's say 10 billion of its currency, of its drachma. This is not the situation of Greece as
- all its obligations are in euros but let's just think about the situation
- and let's say that on top of that it has debt obligations, total debt, total value of debt
- let's say that it was, ... I don't know,..there was another 150 billion of its currency.
- Let's say you inflate over couple of years, so inflation occurs,
- and let's say you have 100% of inflation over few years
- but in real terms your GDP doesn't change, ....so in real terms
- if you have 100% inflation but you producing the same amount,
- the nominal value of your GDP will now be 200 billion.
- It is the same amout of goods and services but everything now costs twice as much,
- so you would value it to 200 billion. If you would have your
- inflation adjusted, it would still be 100 billion. The good thing,
- and it is very seldom that you use inflation to good context,
- but it would be good for Greece in this situation, that these
- entitlement obligations, they would still be 10 billion.
- You still going to say " I'm gonna to still pay you 10 billion" even if that 10 billion
- is goign to buy people half as much. That is much easy to do politically
- than telling people over night that I'm going to reduce your pension by half. This is political suicide.
- But to inflate away the obligations, nominally it looks like you paying the same thing
- but just buying less, it is a little bit more viable to do.
- And the same thing is to review debt obligations.
- Your debt obligations won't adjust the inflation, and so you would still owe
- 150 billion but as the percentage of GDP you've halved how big the debt is,
- you've halved how big the entitlement obligations are. So there is actually a viable solution
- and in this hypothetical situation is probably the best solution
- for government to essentially inflate away its obligations.
- So, I'll leave you with that, something for you to think about and then we can think about
- what could Greece actually do in this directions but more importantly
- let's think about, and you can start to think why is the whole world so scared,
- all of this is Greece, it is relatively small country, so why is whole Eurozone
- so scared, why are people thinking about bailing out Greece
- in some way to prevent all this craziness from happening
- and what are the repercussion in the larger global market.
- But I'll leave you there and leave you to think about all this stuff.
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