Politico Poems!

Euro Crisis! (Explained)

Hello! Initially this was going to be just some random political poems. That was before I was, mind you, very rudely informed that my poetry was amongst the worst here on Wattpad.

So, as a cause of vengeance against those rude people, I had this unique idea of complimenting my bad poetry with my extra bad writing skills.

I am going to start with the Euro Crisis and slowly but steadily move towards more torturing political events.

Happy Reading!!.....Enjoy the sweet torture! *Wicked grin*

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A quick question.

What is a group of countries who find it difficult to manage their homes and then very coolly ask others to share their burden with the threat of a huge monster *read economic collapse* called?

Yep. The Euro crisis. (I know. That was a bad one. I try my best)

So, in 1958 we had something called the European Coal and Steel Community. It evolved soon into the awesome, too good to be true (Who thought a group of grumpy countries could come together and agree on something via consensus) European Union. Yes, we have yet another treaty which records this historical moment- The Maastricht Treaty (Maastricht, is a city in Netherlands) in 1993.

EU introduced a common currency called the Euro which was to be used by all the countries part of EU. It started off with eleven member countries including the famous PIIGS. P-Portugal, I- Ireland,I-Italy,G-Greece,S-Spain.

How did that benefit them, right?

Alrightie. So, these countries namely PIIGS used to get loans at very high interest rates (that was before they joined EU) than if compared to say, Germany.

So, when the PIIGS joined EU, they started getting loans at lower rate of interest. The inflation rate in PIIGS was higher than the rate of interest so, in a way they were paid to borrow. Isn’t that awesome?

The countries (government and citizens) borrowed and borrowed. The lenders were all too happy to let them borrow because they knew Europe would pay them in case of a default.

Then, one fine beautiful morning they reached enormous debts. At times, the lenders used to complain about the irregularity in paying back the money but the PIIGS had their body guard in the form of ECB (European Central Bank) who used to protect them against all the threats.

Example:

You are ultra rich and a sensible human. Now, you obviously get loans easily and you also spend it on activities which add value to your income.

Now, some aliens from some far flung planet come to know about you. They flatter you and butter you. You being the gullible person agree to form an association with them. They get to use your name to get money. So, they keep on taking money; it’s like a blank credit card with interest that will be charged in the future. The aliens take the money and party, burn it, play with it; In other words thoroughly waste it. Now, they demand more money from the lenders who are happy to give it to them because they know it’s in your name and if the aliens fail to pay, you will definitely pay back. After all, it’s about your reputation.

Hmmm. Yeah! When PIIGS were finally seen to be over indebted, the sad fact is the situation can very quickly spiral out of control! Lenders didn’t want to lend them money anymore.

Let’s take Greece:

The Greek government kept its economic policy which consisted of spending more than it received from taxes and minor state entrepreneurial activities. They began to borrow Euros mostly from foreign investors. Euros were flowing into the country and corresponding promises to pay back later including some interests (= bonds) flowing out. Private Greek agents too borrowed within the country as well as abroad. They used the money in amazing, unique ways; To get around pay restraints in the calendar year the Greek government simply paid employees a 13th and even 14th monthly salary -- months that didn't exist. They had money; they kept using that to keep the people happy in order to get more votes during elections.

One day the bubble burst. They realized they had not created infrastructure with the money which would have helped them to create employment opportunities and also, would have given returns on the investment.

The situation turns out to be pretty messy because it is interlinked. Take the case of Germany, which keeps contributing to the ECB rescue fund.

 'The German government gives money to the rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks’. In case of Greece, a lot of German and French banks which have lent money will be in trouble if Greece defaults.

So, you see. It’s a chain reaction.

Why can't countries get out of the Euro and go back to their own currencies and then print money to repay their creditors?

The thing is that the mechanics of leaving the Euro is pretty crazy. Also going back to your own currency might lead to other problems for a country. When countries go back to their own currencies to print it and repay debt, citizens will be concerned. Simply because when a country prints currency in huge quantities, the currency will not remain of any real value. So the citizens of the country will try and move their money to either other assets like gold, or will continue using the Euro. This will lead to bank runs or bank panic, with all the people queuing up at banks at the same time demanding their money back. This, in turn, will lead to a lot of banks collapsing.

We have these two people who elaborated on this scary situation using Italy’s example- Mauldin and Tepper : 'Households and firms, anticipating that domestic deposits would be redenominated into the Lira (Italy's currency before it started using the euro), which would then lose value against the Euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into Lira would shift into claims on other euro-area governments, leading to a bond market crisis . . . this would be the mother of all financial crises.

Also, this will result into downgrade of ratings by our cutie pies credit rating agencies; S&P, Moody, etc which will result into riding bond yields and further downgrade of governmental debt.

Moral of the story-

It’s easy to get into relationships but when you try to get out of them, it hurts and is awesomely difficult.