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Current time:0:00Total duration:8:09

Video transcript

given all of 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 has 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 20s 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 asking for higher and higher interest rates from Greece these are the long-term interest rates in Greece and so the possible outcomes the possible outcomes that we're talking about here so this is Greece the possible outcomes for Greece the only way that they're able to stay in the eurozone is if someone essentially writes them a really really huge check that essentially takes care of a good bit of their debt so one option is 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 what it with the bailout people are saying hey look if we're 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 some form of austerity now we've already talked about 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 have already have unemployment 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 in unemployment is due to the fad 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 the only viable option for Greece is to go off the euro so leave leave the eurozone the eurozone is the subset of European Union countries that use the euro as their currency and we already talked about this would not be a painless process they would leave the eurozone they would maybe their new currency would be the new Greek drachma drachma and with this it would probably be 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 and that's why because this this outcome is looking more and more likely people are there's essentially a run on banks in Greece right now people are going withdrawing their euros so that they can stuff it in their mattress and so that it won't be converted into devalued drachmas but that's having the effect of really weakening and potentially breaking down the banking system so you could have bank failures Bank you could have bank failures and the whole strategy of 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 definitely happened in the past and countries in this situation could very easily turn to hyper 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 the in the medium term the economy can really fall apart and it's really not clear how how outside of maybe an extra generous bail out how that can be how that can be avoided and so in that situation economy falls apart economy falls apart falls apart and when economy falls apart in a big way and you have major social and you have major unemployment it's a scary thing it can lead to social unrest we're not talking about 8 9 percent 10 percent unemployment like we have the United States we're talking about 20 30 40 percent unemployment even higher in the folks that are likely to be unrest phul socially which is the young people and so this could lead to social unrest social unrest and even radicalization of the you know when people get when people start worrying about whether they're going to 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 a 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 that's how World War one and World War two got started and so just by that set just that reason alone is reason enough for people for people to think very seriously about bailing Greece out and that doesn't come without moral consequences the counter-argument is if we bail them out if we bail them out doesn't this reward doesn't this reward mismanagement and overspending Mis mismanagement mismanagement and even a little bit of shady accounting on their national on their national economic statistics so there's very good reason if you are a German taxpayer that you're very suspicious suspicious of these bailouts you why do we keep writing checks to the Greeks if they're not willing to take some pain now the Greek side of it is look we've already taken amount of pain we're already kind of on the brink possibly cross the brink if you take us if you if you force even more pain on us then we're going to be in a really where our society is that the risk of falling apart so we're in desperate situation this isn't a time to kind of force us to kind of force a moral point on us so that by itself is reason why people are worried but then there's 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 if I say the European Union or Europe is not able to bail out Greece that's an implicit signal to the rest of the world that Europe is not able to essentially bail out its countries and so you see on this chart right over here you see on this chart right over here Greece is not alone it's definitely the worst but right behind it you have Portugal and it's debt you have long-term debt with interest rates it looks like it's around in the 12 and 13 percent range Portugal has a 93% debt to GDP ratio it already has a very high unemployment rate if Greece is allowed to leave the eurozone and does not get bailed out investors are going to start wondering well hey maybe Portugal is not going to get bailed out that's 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 in the way that they're operating but every increase in a percentage point right over here is going to really eat into Portugal's GDP and kind of force them down this debt spiral their debt is a percent of GDP is almost 100 percent if that de pay an extra 1% on that that 1% is going to eat into their GDP and it's going to force that Portugal to become the economy to slow down even more and make it even more and more onerous and then 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 there's I guess there's two major fears one is Greece by itself can become a point of instability in Europe but the second fear is if this thing isn't solved that this could cause kind of contagion or a chain reaction through Europe that people start getting freaked out they start wanting to not lend to these countries and that becomes a self-fulfilling prophecy well they might also have to leave the eurozone