Eurozone debt crisis is and has been the major headlines on all financial news websites and news channels for at least a year now. It's impact is felt in economies world over and the threat is still looming over, with no resolution yet in sight. So, what is happening there? Big debts, growing deficits and stalling economies across Europe, with Greece being the most affected.
Let's analyse why this all began. Initially, during the 2002-2008 period, high budget deficits and debt levels rose due to high risk lending and borrowing practices, international trade imbalances, real estate bubbles that had burst, slow economic growth and approaches used by nations to bailout troubled banks and private bondholders. However, the main culprit is in the form of economic worries that have spooked the markets. Investors were hit with fear that Greece and other Europe nations would not be able to repay their debts. If a nation defaults on government bonds, the investors, such as banks across Europe would face severe losses. This led to potential buyers from declining these nations' bonds which pushed the prices down. When prices of bonds go down, the yield goes up which means the goverments have to pay higher interest for investors to buy their bonds.
This has impacted Greece in 2 major ways. First is that Greece is struggling to afford the huge interest rate on its debts and second, since there is no demand for Greece's bonds, it is not able to borrow new debts to pay off existing debts. Without bailout, the result is default. The impact on Greece has spread to other European nations as a domino effect. Other Euro nations in trouble are Portugal, Ireland, Spain and Italy.
Let's analyse why this all began. Initially, during the 2002-2008 period, high budget deficits and debt levels rose due to high risk lending and borrowing practices, international trade imbalances, real estate bubbles that had burst, slow economic growth and approaches used by nations to bailout troubled banks and private bondholders. However, the main culprit is in the form of economic worries that have spooked the markets. Investors were hit with fear that Greece and other Europe nations would not be able to repay their debts. If a nation defaults on government bonds, the investors, such as banks across Europe would face severe losses. This led to potential buyers from declining these nations' bonds which pushed the prices down. When prices of bonds go down, the yield goes up which means the goverments have to pay higher interest for investors to buy their bonds.
This has impacted Greece in 2 major ways. First is that Greece is struggling to afford the huge interest rate on its debts and second, since there is no demand for Greece's bonds, it is not able to borrow new debts to pay off existing debts. Without bailout, the result is default. The impact on Greece has spread to other European nations as a domino effect. Other Euro nations in trouble are Portugal, Ireland, Spain and Italy.
No comments:
Post a Comment