Thoughts from a Cylon

Random thoughts on everything from technology to video games to politics to world events. But probably mostly the first two.

Friday, January 27, 2012

Thoughts on the European Debt Crisis, Greece, and the Fate of the Euro

I decided to start this blog off on a light subject, so naturally I chose the European Debt Crisis.  For those of you who don't know what that is, it's the problems that the European Union is having primarily with Greece's massive debt, along with other countries that are in financial trouble, including Portugal, Spain, and Italy.

Greece is the country that is in the worst shape, hence the majority of the press it receives.  Basically, Greece's government is completely broke and has had to receive multiple bailouts from the other countries in the European Union, mainly Germany and France.  When I say bailout, I'm not talking about a couple million Euros, Greece received in May of 2010 110 billion Euros, with another 109 billion on the way.  The problem with this, Greece's debt exceeds 340 billion Euros, and it has no way to pay back the money it has been receiving.  At the moment, investors (mostly banks) are being told not to expect repayment on up to 50% of the money they are currently lending out.  The fear, which is growing, is that Greece will end up defaulting on its debt payments and not be able to pay back the money they have received.

So what would happen if Greece were to default? From this BBC News article, "Europe's banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A "disorderly" default could mean much of this debt not being repaid - ever." Greece, in order to receive these bailouts, has created even more problems at home.  In order to receive the 110 billion bailout, they agreed to austerity measures that included cutting public spending and raising public taxes.  This lead to riots throughout Greece which occurred in 2010 and 2011.

                                                        Greek Riots                    Source:

A recent pact was created by the members of the European Union to fight the debt crisis through tax and budget means, and Britain, a member of the EU, chose not to be a part of it.  This has lead to much anger towards Britain from other members of the EU.  However, Britain does not actually use the Euro, and they have long seemed to ignore the problems that have been caused by it.  This article discusses much of the anger directed towards Britain, with one German politician saying "Either they [the British] do it on their own initiative, or the EU refounds itself - without Great Britain. Switzerland is a model towards which Britain can turn itself."

As stated in the title, what does this all mean for the fate of the Euro? From here on out, this is just conjecture and personal opinion of what I think could happen.  With Greece and many more countries falling further into debt, I think it's just a matter of time until Greece has to default on their loans.  This will likely be a disorderly default, as I don't see a way that Greece will be able to pay back their debts, even with decades to do it.  This will cause many of the banks who are the holders of those loans to go bankrupt.  While there are at least 4 to 5 countries that are currently slated to use the Euro in the coming years, I think more countries will follow Britain's example and choose not to adopt the Euro, or revert back to the currency they used before the Euro.  If Greece defaults, this is going to cause many of the banks and lenders who were so anxious to loan them the money to become wary of helping out other countries in need, such as Spain and Italy.

Basically, it seems like the European Union could end up collapsing from the weight of this debt.  Speculator George Soros recently speculated that the EU could collapse, which caused the Euro to fall on the foreign exchanges.  Soros said, "Unfortunately, the European authorities had little understanding of how financial markets really work, and did everything wrong,"

Overall, it will be interesting to see what will happen to the European Union and the Euro if Greece defaults on its debt, as that seems to be what is holding everything together at the moment.  Americans should especially pay attention, as the United States is currently 15 trillion dollars in debt and seems to have no way of paying it off.

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