The Greek Problem - Please Explain!!

Slideshowbob

Can anyone in brief and in layman's terms - explain what is going on in Europe?

Why does it affect Ireland?

What are the speculators doing to make it worse?

Thanks

Eliot Rosewater

Suppose you go into a shop, and pick up a load of extravagant items for your family. You tell the shopkeeper that you'll pay him later and the shopkeeper, knowing you have lots of wealthy friends, agrees. You start doing this on a regular basis, building up a sizable tab.

A few weeks later you lose your job, and it becomes clear that the extravagant spending needs to end. However your family refuses to accept this, and goes out on strike when you tell them that the Sky subscription has to be canceled. They also burn down the garden shed. Meanwhile, the shopkeeper needs to be paid, and unless you cut down on spending, that money won't appear. However your family continues to insist that it's the shopkeeper's fault, and they say your wealthy friends have a responsibility to pay for their way of living. A financial mess ensues.


You = Greek government.
Your family = Greek people.
Wealthy friends = Eurozone members.
Shopkeeper = Greece's lenders.

Basically the Greeks overspent "virtual" money; now they have to pay for the stuff they got, but the people refuse to accept it. They've a gigantic deficit, hence the bailout. The Greeks' bond status has been downgraded, which makes it hard for the Greek government to borrow money. It's destabilizing the Euro because Greece is a loose end, and problems with their country could damage the Eurozone as a whole.

Slideshowbob

Eliot Rosewater wrote: »

Greece is a loose end, and problems with their country could damage the Eurozone as a whole.

Why?

ei.sdraob

Slideshowbob wrote: »

Why?

Because we are all tied by same currency, a currency in which some trust and confidence was lost very quickly due to events in Greece, the fact that Ireland and other countries are drowning in debt doesn't help inspire any "confidence"

without confidence paper money is just that, pieces of paper

Slideshowbob

hmmmm but cant a euro still buy the same amount of bread anywhere in the eurozone as it could last year?

It aint as if the currency has become worthless

how are the speculators making it worse?

ei.sdraob

Slideshowbob wrote: »

hmmmm but cant a euro still buy the same amount of bread anywhere in the eurozone as it could last year?

It aint as if the currency has become worthless

how are the speculators making it worse?

it no longer buys the same amount outside the eurozone as compared to other currencies (which are all over the place to due to their own troubles)

for example EUR:USD has went from 1:1.50 to 1:1.25

It might not seem significant to you but when you are a country or company dealing with large amounts of money thats a fairly wild swing

anyways thats only the tip of the iceberg

the main problem is that thanks to Greece and other PIIGS being up to their neck in debt no one is willing to lend money cheaply

we need access to cheap lending since the country is spending more than its earning (think of getting a mortgage of 5% as opposed to a mastercard loan of 15%, you want a lower interest since the money has to be repaid + interest)

basically if no one is willing to lend to us, its only a matter of few weeks before we have to beg the imf to step in, and that would mean steep sharp cuts fast, riots and people being burned alive...

Slideshowbob

so what are the speculators speculating on that is causing such consternation?

and what is the likely outcome and timeline in this?

mike65

Confidence means lower interest rates and a willingness to lend, no confidence means expensive money, means less can be borrowed to pay the public sector and public services which means cuts in same. Expensive money at retail level means businesses can't borrow to invest and your loans for "stuff" cost more to pay back. Economic activity is supressed the dole queues get longer and we stay poorer for longer.

ei.sdraob

Slideshowbob wrote: »

so what are the speculators speculating on that is causing such consternation?

They are speculating that Greece despite a bailout will remain a basket-case and the debt will never be repaid (default)

Seeing people being burned doesn't inspire any confidence of course

also the euro is not "worthless" as you said earlier its just "worth somewhat less" , so if you have €100,000 in bank you are now 10% poorer than if you exchanged that 100,000 into us dollars back in January (the dollars is all over the place too but its just an example)

Slideshowbob wrote: »

and what is the likely outcome and timeline in this?

I dont know, its been unravelling since start of year and now getting faster

we will find out tomorrow as to what the EU will do about this problem, and whether whatever they have planned is enough...

whatever happens it might take months before average person might fell any effects (unless it gets really ugly)

Slideshowbob

ei.sdraob wrote: »

They are speculating that Greece despite a bailout will remain a basket-case and the debt will never be repaid (default)

how do they do this?

Nijmegen

Slideshowbob wrote: »

how do they do this?

They raise the interest rates on Greek government debt.

If Greece wants to buy more debt (it has to), it pays a higher interest rate - the higher interest rate is what the market demands as compensation for the risk they run of Greece going bankrupt. The riskier the road, the greater the rewards.

We're all compared to the rate that Germany pays, because Germany is typically seen as a rock solid state that is in no danger at all of collapsing. Therefore, their rate is the base - it's the rate that you ought to pay if you're a healthy economy that can pay its bills, paying a small % to the market for lending you money.

The more the market thinks Greece is in danger of default, the more they charge Greece for debt.

Diarmuid

Slideshowbob wrote: »

so what are the speculators speculating on that is causing such consternation?

when you hear about "speculators" from politicians, what they really mean is investors who don't believe the bs those same politicians are telling them.

In line with the second post: after losing your job, you tell the shopkeeper that ever thing is fine and dandy. When he doesn't believe you and wants to charge you a higher interest rate, you call him a speculator.

(technically all investing is speculating but the word itself has taken on negative meanings)

dan_d

http://www.irishtimes.com/newspaper/finance/2010/0507/1224269870156.html

OP,read the above article, it was in the Irish Times last week. As someone who knows all of absolutely nothing about what's going on, this actually explained things to me quite well!!

#15

Can anyone clarify or explain this to me?

4 Who or what is the “bond market”? Are they rational investors managing people’s savings or greedy sociopaths?

The main buyers of sovereign debt are typically pension funds and other institutions looking for stable long-term investment returns to match their liabilities: the pensions they must pay to their customers. In totality they, along with various other classes of investors, make up “the bond market”.

But as with all assets, government debt attracts speculators looking to make short-term profits from market events rather than hold the investment for the long term. The prospect of a Greek default is the sort of event that speculators would find attractive.

The part in bold.

1) How can a speculator make a short-term profit from a market event?
2) How would a default be attractive to a speculator? Wouldn't they lose the money that they have lent?

I have probably got this completely wrong, but if I don't ask, I'll never know!

ei.sdraob

#15 wrote: »

Can anyone clarify or explain this to me?



The part in bold.

1) How can a speculator make a short-term profit from a market event?
2) How would a default be attractive to a speculator? Wouldn't they lose the money that they have lent?

I have probably got this completely wrong, but if I don't ask, I'll never know!

short selling I presume (i.e. shorting)

Sponge Bob

The Greek problem is simple. After their official statistics had been found out for about the 4th time in 10 years nobody trusted their official statistics any more and because investors had no idea what they were dealing with they refused to fund them any more.

Sadly the Eurozone had been conned by one lot of dodgy stats and had let the feckers in and now we are part of a collective Eurozone plan to stabilise or even bail them out!

Banned Account

The real issue is that you can make the most money in times of turbulence. The further the distance between the peaks and Troughs, the bigger your potential margin. What I can't believe is that we are still swallowing all the hullabaloo. It was patently obvious that Greece wasn't going to be allowed default on its debt, nor Portugal, Spain, Ireland etc. etc. Yet the panic was still allowed ensue.

The ratings agencies have been instrumental in causing this volatility and I personally think that they should be rated themselves according to the accuracy of past predictions - this may make them think twice in the future.

The Germans, I suspect were quite happy to drag the decision making out, there bonds are secure anyway and, as the Eurozone largest exporter, they will benefit from a weaker Euro. I have stopped paing attention to the hysteria now it's very much ado about precious little.

Nijmegen

Fitzcaraldo wrote: »

The real issue is that you can make the most money in times of turbulence. The further the distance between the peaks and Troughs, the bigger your potential margin. What I can't believe is that we are still swallowing all the hullabaloo. It was patently obvious that Greece wasn't going to be allowed default on its debt, nor Portugal, Spain, Ireland etc. etc. Yet the panic was still allowed ensue.

The ratings agencies have been instrumental in causing this volatility and I personally think that they should be rated themselves according to the accuracy of past predictions - this may make them think twice in the future.

The Germans, I suspect were quite happy to drag the decision making out, there bonds are secure anyway and, as the Eurozone largest exporter, they will benefit from a weaker Euro. I have stopped paing attention to the hysteria now it's very much ado about precious little.

The vagaries of the 'confidence' in the market is difficult to control, but one needs the markets and its odd mentality at times.

How and ever, I think we will see some stricter controls brought in to try and keep this sort of panic under some more control. Dr. Merkel was discussing speculators and ratings agencies in a fashion that suggests more controls are to come, and in a battle between government and the markets for regulation, the government will always win.

I agree that more regulation is needed... So long as it doesn't stifle the free market in a productive sense. Giving too much weight to protecting basket case countries that have overspent their bill completely would be a bad thing, for markets and for countries.

ei.sdraob

Nijmegen wrote: »

The vagaries of the 'confidence' in the market is difficult to control, but one needs the markets and its odd mentality at times.

How and ever, I think we will see some stricter controls brought in to try and keep this sort of panic under some more control. Dr. Merkel was discussing speculators and ratings agencies in a fashion that suggests more controls are to come, and in a battle between government and the markets for regulation, the government will always win.

I agree that more regulation is needed... So long as it doesn't stifle the free market in a productive sense. Giving too much weight to protecting basket case countries that have overspent their bill completely would be a bad thing, for markets and for countries.

I find it funny that these speculators and "wolf packs" are in fact European (mostly French) banks shorting the euro

its so perverse and evil

Banned Account

I am, slowly begining to think that, over the past three years in particular, the markets have shown so little in the line of rationality, that we may be best off with a purely regulatory regime, that said, it may be easier to pry a smith and wesson from the cold dead hands of Charlton Heston.

Nijmegen

Fitzcaraldo wrote: »

I am, slowly begining to think that, over the past three years in particular, the markets have shown so little in the line of rationality, that we may be best off with a purely regulatory regime, that said, it may be easier to pry a smith and wesson from the cold dead hands of Charlton Heston.

As with most things in life, a middle of the road solution is best. Under regulate, they go wild. Over regulate, they do nothing and things freeze up.

A healthy economy requires the free flow of capital.

Banned Account

Nijmegen wrote: »

A healthy economy requires the free flow of capital.

The problem is that we now have neither.

gandalf

Good Article today in Der Spiegel on this. I thought our public services were messed up but they are only small time compared to the Greek situation.

http://www.spiegel.de/international/europe/0,1518,694263,00.html

ei.sdraob

Fitzcaraldo wrote: »

The problem is that we now have neither.

oh we have a flow of capital alright

out of the country...

you want it to comeback then restore confidence in this sinking ship, turning to more regulation will ensure the capital will leave faster

Scarab80

deadtiger wrote: »

Good Article today in Der Spiegel on this. I thought our public services were messed up but they are only small time compared to the Greek situation.

http://www.spiegel.de/international/europe/0,1518,694263,00.html

Excellent article, oh to have a competent media in this country who would do more than regurgitate press releases.

The_Honeybadger

deadtiger wrote: »

Good Article today in Der Spiegel on this. I thought our public services were messed up but they are only small time compared to the Greek situation.

http://www.spiegel.de/international/europe/0,1518,694263,00.html

Thanks for that a great read,

The HSE looks like a well oiled machine compared to the Greek PS it would seem.

Sandvich

dan_d wrote: »

http://www.irishtimes.com/newspaper/finance/2010/0507/1224269870156.html

OP,read the above article, it was in the Irish Times last week. As someone who knows all of absolutely nothing about what's going on, this actually explained things to me quite well!!

To be honest, there are definitely hints of this article being biased towards the right wing/neoliberal side of things. I don't think they realise how useless the IMF have been.

ei.sdraob

Sandvich wrote: »

To be honest, there are definitely hints of this article being biased towards the right wing/neoliberal side of things. I don't think they realise how useless the IMF have been.

South Korea knocked on the door and said hello

Banned Account

ei.sdraob wrote: »

oh we have a flow of capital alright

out of the country...

you want it to comeback then restore confidence in this sinking ship, turning to more regulation will ensure the capital will leave faster

Then so be it, at least once we have reached a realistic level, we may know where we stand for the years to come. The problem as I see it is that we are trusting our financial security to a market system which has proven itself to be irrational, unstable and hysterical. Thsi does not, a good base for economic stability make.

A well regulated system would make it much easier to attract capital in, especially given the recent spike in soverign bond spreads. The past three years in the markets have proven that nothing has fundamentally changed since the 1930's, if we do make make significant structural changes, why should we expact not to be back here in the not too distant future?

ei.sdraob

Fitzcaraldo wrote: »

Then so be it, at least once we have reached a realistic level, we may know where we stand for the years to come. The problem as I see it is that we are trusting our financial security to a market system which has proven itself to be irrational, unstable and hysterical. Thsi does not, a good base for economic stability make.

A well regulated system would make it much easier to attract capital in, especially given the recent spike in soverign bond spreads. The past three years in the markets have proven that nothing has fundamentally changed since the 1930's, if we do make make significant structural changes, why should we expact not to be back here in the not too distant future?

You do realize that your line of thinking regarding shunning out markets and complete regulation leads to a very dark place

:cool:

btw alot has changed since 1930s in economics and the world in general, the fact that you claim nothing changed shows how little history you know

Banned Account

ei.sdraob wrote: »

You do realize that your line of thinking regarding shunning out markets and complete regulation leads to a very dark place

:cool:

btw alot has changed since 1930s in economics and the world in general, the fact that you claim nothing changed shows how little history you know

Do you not think that it is just the eeniest weeniest stretch of the imagination to say that the current situation in North Korea is a direct result of free market regulation? or is there something many of us don't know.

My point regarding the 1930's was to say, if you re-read the post, that our current free market structures are fundamentally the same, economics has moved on in many ways, but the fact that we have the sme depth of crash, caused by the same pattern of failure (granted the catalyst was different) just goes to show that we have not fixed our deficiencies, we have just temporarily plugged a few leaks.

The real problem is that we live in a pradoxical situation whereby our economic liveihoods and health are ultimately based on trust and faith. Those who successfully create mistrust and unease, can make vast sums of money - ask George Soros.