Greece, Ireland, Spain, and Portugal have had scary economic problems for months and in general Germany and the other prosperous EU countries have been reluctant to take on the risk that would come with bailing them out. However, this article says that recently banks in the EU have been buying up bonds from risky banks. "the European Central Bank inadvertently encouraged institutions to increase their risk." The author suggest that this could be because the banks could use debt from these countries as collateral for loan interest loans from the European Central Bank.
This worries me. Overall, these transcations increase the risk that the EU is facing. Also, France is quoted as having "exposure to Greece alone as $111.6 billion, though only $27 billion of that was government debt". "German banks’ exposure to Greece totaled $51 billion, of which $23.1 billion was government debt." The article also posted figures fro the exposure in Ireland.
However, an official from the International Monetary Fund (IMF) is quoted saying " There are “obviously risks and challenges, but things seem to be moving more or less in the line with our forecasts", so maybe this is not as worrisome as I had originally thought.
Any thoughts or related articles anyone has found ?
In order for the European financial system to stabilize, there cannot be countries with such extreme debt like Spain, Portugal, Ireland and Greece. What these countries need is exactly what the E.C.B. is pushing for, which is more prosperous countries to increase their holdings in Greece, Ireland, Portugal and Spain due to the fact that they cannot overcome this debt crisis alone. The E.C.B. is giving good incentive for other countries to increase their holdings because the E.C.B. “has been lending euro-zone banks as much as they want at 1 percent interest, provided the banks can put up collateral like government bonds”. The only question is whether Ireland, Greece, Portugal and Spain’s economies will eventually grow enough to pay back the large sums that they have been credited. The majority of the credit appears to be coming from prosperous countries that are capable of investing such a large sum without much concern. However, the future holdings in these countries that are in crisis will decrease tremendously if they are not able to pay back this credit. This would create a huge lack of confidence in these four country's economies which is why foreign help would decrease. So in my opinion this is a good solution to help bring these countries out of debt, but there is also a large chance that it can backfire.
ReplyDelete