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Video transcript
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.