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Here is an article about the tough times European countries hare having in terms of the debt crisis.
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The article states that Portugal is joining Greece and Ireland in seeking a European Union-led bailout. "Portugal’s need for emergency assistance became inevitable last month once its parliament rejected the government’s plans for yet another round of austerity." The country has been faced with credit-rating downgrades, deterioration in market spreads and access, and in balance-sheet issues in Portugese banks. Those issues have lead Portugal to allow access to emergency funds from other governmental sources to meet its debt obligations and to reduce the probability of a banking crisis. The article states that the European Union, European Central Bank, and the International Monetary Fund are trying to change the way they will help the 3 countries being bailed out if the trend continues to other countries in Europe. The focus, "will shift away from liquidity and on to solvency well before 2013."
On the surface, Portugal's problems mirror Ireland and Greece's. The biggest fear is that Portugal’s bailout is another indication that Europe’s peripheral debt crisis will devastate Italy and Spain next.
So what do you think of the efforts to shift the focus from liquidity to a more durable solvency solution for the continent’s debt crisis? Do agree that the additional the burden to stressed taxpayers and users of public services is a good approach?
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Interesting comments. I once read an article that argued that currency unions (euro) never work (there's a better word to describe this situation but I can't think of it). The basic problem with these countries is that when one country fails it becomes another other country's problem (Ireland) thus the level of cooperation between counties needs to be incredibly efficient. Personally I think the situation within the EU has the potential to spiral out of control very quickly. If this issue stretches to Italy or Spain as the article mentions the EU is in for a lot of trouble. This seems to be a non issue however as the Euro is strengthening daily. My personal view is that if the problem does extend to Spain or Italy to the extent it had in Greece the EU could potentially fail.
ReplyDeleteAs for your question about shifting from liquidity to solvency I think this is a wise decision. We talked about long term vs. short term decisions briefly last class and solvency is definitely better for the long term.
Also, I am confused by what this article means by shifting the focus away from liquidity. I know what liquidity means but I don't understand it in this context. Can anyone clue me in?
I think it will be difficult to shift the financial burden of the state onto the people in those countries but I don't see what choice they have. The money has to come from somewhere. Also I agree that it is scary to think of the debt crisis starting to domino across other countries.
ReplyDeleteWouldn't it be nice if analysts defined their terms for us? Liquidity (in the context of this article) means loaning money. The idea was that this loans would create enough liquidity to restart economic growth through money creation and lending while, at the same time, the country's public and quasi-public institutions would repay the loans. Hence the need for austerity. This route has failed in these countries. So now they are turning to sovency--recreating a sustainable financial and economic system in these countries. How to structure the loans so these are the last of them. Can you borrow your way to solvency?
ReplyDeleteYeah, it doesn't seem to be plausible in the long run for countries to keep borrowing and borrowing to create growth. At some point, you can only pump so much money into the economy where the funds are coming from unknown or unreliable sources. The debt will pile to an insurmountable problem.
ReplyDeleteMy question is, what do the countries that are doing well, like France and Germany, have to say about the debt. I feel like they would be tremendously upset that they are holding up most of the Euro because of their stable economies. Will this cause problems for them? Or does the weakened Euro increase exports and business? Only time will tell I guess...