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purplecatB. and I have decided that we are Very Confused about Greece and the euro. So in the hopes that someone on my flist (e.g. ![[livejournal.com profile]](https://www.dreamwidth.org/img/external/lj-userinfo.gif)
philmophlegm or wellinghall) can help I said I'd underline our understanding of what is going on and then the flist can tell us where we're wrong and fill in the gaps.
So currencies are issued by Mints/Central banks and can be used to buy stuff. Although the international financial markets are prone to playing all sorts of silly games, the value of a currency presumably, at some level, correlates to how much you can buy with it. So if your country doesn't produce much stuff, or at least not much for export, then your currency isn't worth a great deal and vice versa. An added complication is the enthusiasm with which the central bank/mint may decide to print more money which may (or may not) have various short term benefits depending upon the economic theory to which you subscribe but long term tends to encourage inflation and means you can buy less with the money (and vice versa - we have a dim impression that Norway keeps its exchange rate high(?low) by keeping crone scarce in some way). So theoretically a country could be very productive but its currency wouldn't be worth much on international markets because of a perception that the central bank was inclined to print more money (or indulge in Quantitative Easing which is an area of mystery to B. and I but not one we are immediately urgently mystified about) at the drop of a hat. In different countries the government may have more or less control over the central bank for the currency and thus more or less direct influence over the value of the currency. For instance East Timor uses the US Dollar and presumably has precisely zero influence over any decisions over whether to print more money. We assume that the countries "in the euro" have some influence over the decisions of the European Central Bank but rather less than, say, the US government has over the Federal Reserve. Or at least we assume that Greece has less influence even if France and Germany may wield a great deal. Similarly Greece being a comparatively small and unproductive economy we assume that the presence of Greek goods among those that can be purchased with euro doesn't make a lot of difference to the underlying value of the euro and what difference it does make is largely negative.
So governments also issue bonds which, as we understand it, are a financial product in which the government borrows money at a certain interest rate in, presumably, the preferred currency of the government. We assume these operate like many such products but that they are normally considered relatively safe since governments have tax revenue and state assets with which to underwrite the bonds. Of course in a country where the government has a lot of influence over the central bank they could choose to pay the interest on the bonds by effectively printing more money, thus reducing the value of the bonds in real terms but meeting the contractual requirements. This option, presumably, isn't available to Greece. European banks may have bought a lot of Greek bonds and therefore the fortunes of those banks may be tied to the fortunes of Greece but the European Central Bank itself isn't tied to them in the same way (i.e. Germanys tax revenue isn't tacitly underwriting greek bonds because the European Central Bank has guaranteed those bonds in some way, shape or form).
If Greece were to leave the euro it would gain the option to print money and use inflation to wipe out its debts, though it would need to change its bonds from euro to drachma but presumably there is some plan for this. The end result would probably be no less painful for Greece than austerity but there would be a less obvious external scapegoat which would make life easier for a number of people involved in decision making, if nothing else. The outcomes for Greece look pretty grim either way really.
If Greece remains in the euro but defaults on its bonds what effect does this have on the euro itself? (as opposed to being generally bad for Europe but Greece going bankrupt is pretty bad for Europe irrespective of whether it is within or outside of the euro, right?) Greek government bonds are no longer something you can buy with euro (or would want to) but presumably at the moment very few people want to buy them anyway. How is the effect of Greece going, effectively, bankrupt from within the euro worse for the euro than the effect of Greece leaving the euro and then going bankrupt?
Similarly can the euro eject Greece. Obviously Greece can be refused access to decision making at the central bank but, presumably like East Timor and the US Dollar, Greece could continue to use the euro if it wished. I realise this isn't on the table but I'd be interested to know what difference this would make. Would Greece going bankrupt while using the euro as its official currency but not being "in the euro" be different to Greece going bankrupt from within the euro? Does the US Federal Reserve worry that East Timor may go bankrupt?
Lastly up until about a week ago lots of people were saying how terrible it would be if a precedent were set that a country could leave the euro. Is this just because if Greece were to leave, the option would be open for Germany to take its toys home which, obviously, would have quite a negative impact on the value of the currency since Germany has a large and productive economy or would there be investments which would lose value simply because Greece had left in some way. Have people, for instance, been buying Greek bonds on the assumption that they were, in some way, guaranteed by the Central bank or... or... what?
Why is a country leaving the euro such an option of almost unthinkable last resort? Why is a small economy within the euro going bankrupt such a disaster specifically for the euro? Why does the euro care about Greece when there is no evidence the US Dollar cares either way about East Timor?
philmophlegm or wellinghall) can help I said I'd underline our understanding of what is going on and then the flist can tell us where we're wrong and fill in the gaps.So currencies are issued by Mints/Central banks and can be used to buy stuff. Although the international financial markets are prone to playing all sorts of silly games, the value of a currency presumably, at some level, correlates to how much you can buy with it. So if your country doesn't produce much stuff, or at least not much for export, then your currency isn't worth a great deal and vice versa. An added complication is the enthusiasm with which the central bank/mint may decide to print more money which may (or may not) have various short term benefits depending upon the economic theory to which you subscribe but long term tends to encourage inflation and means you can buy less with the money (and vice versa - we have a dim impression that Norway keeps its exchange rate high(?low) by keeping crone scarce in some way). So theoretically a country could be very productive but its currency wouldn't be worth much on international markets because of a perception that the central bank was inclined to print more money (or indulge in Quantitative Easing which is an area of mystery to B. and I but not one we are immediately urgently mystified about) at the drop of a hat. In different countries the government may have more or less control over the central bank for the currency and thus more or less direct influence over the value of the currency. For instance East Timor uses the US Dollar and presumably has precisely zero influence over any decisions over whether to print more money. We assume that the countries "in the euro" have some influence over the decisions of the European Central Bank but rather less than, say, the US government has over the Federal Reserve. Or at least we assume that Greece has less influence even if France and Germany may wield a great deal. Similarly Greece being a comparatively small and unproductive economy we assume that the presence of Greek goods among those that can be purchased with euro doesn't make a lot of difference to the underlying value of the euro and what difference it does make is largely negative.
So governments also issue bonds which, as we understand it, are a financial product in which the government borrows money at a certain interest rate in, presumably, the preferred currency of the government. We assume these operate like many such products but that they are normally considered relatively safe since governments have tax revenue and state assets with which to underwrite the bonds. Of course in a country where the government has a lot of influence over the central bank they could choose to pay the interest on the bonds by effectively printing more money, thus reducing the value of the bonds in real terms but meeting the contractual requirements. This option, presumably, isn't available to Greece. European banks may have bought a lot of Greek bonds and therefore the fortunes of those banks may be tied to the fortunes of Greece but the European Central Bank itself isn't tied to them in the same way (i.e. Germanys tax revenue isn't tacitly underwriting greek bonds because the European Central Bank has guaranteed those bonds in some way, shape or form).
If Greece were to leave the euro it would gain the option to print money and use inflation to wipe out its debts, though it would need to change its bonds from euro to drachma but presumably there is some plan for this. The end result would probably be no less painful for Greece than austerity but there would be a less obvious external scapegoat which would make life easier for a number of people involved in decision making, if nothing else. The outcomes for Greece look pretty grim either way really.
If Greece remains in the euro but defaults on its bonds what effect does this have on the euro itself? (as opposed to being generally bad for Europe but Greece going bankrupt is pretty bad for Europe irrespective of whether it is within or outside of the euro, right?) Greek government bonds are no longer something you can buy with euro (or would want to) but presumably at the moment very few people want to buy them anyway. How is the effect of Greece going, effectively, bankrupt from within the euro worse for the euro than the effect of Greece leaving the euro and then going bankrupt?
Similarly can the euro eject Greece. Obviously Greece can be refused access to decision making at the central bank but, presumably like East Timor and the US Dollar, Greece could continue to use the euro if it wished. I realise this isn't on the table but I'd be interested to know what difference this would make. Would Greece going bankrupt while using the euro as its official currency but not being "in the euro" be different to Greece going bankrupt from within the euro? Does the US Federal Reserve worry that East Timor may go bankrupt?
Lastly up until about a week ago lots of people were saying how terrible it would be if a precedent were set that a country could leave the euro. Is this just because if Greece were to leave, the option would be open for Germany to take its toys home which, obviously, would have quite a negative impact on the value of the currency since Germany has a large and productive economy or would there be investments which would lose value simply because Greece had left in some way. Have people, for instance, been buying Greek bonds on the assumption that they were, in some way, guaranteed by the Central bank or... or... what?
Why is a country leaving the euro such an option of almost unthinkable last resort? Why is a small economy within the euro going bankrupt such a disaster specifically for the euro? Why does the euro care about Greece when there is no evidence the US Dollar cares either way about East Timor?
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Date: 2011-11-05 11:51 pm (UTC)"We assume these operate like many such products but that they are normally considered relatively safe since governments have tax revenue and state assets with which to underwrite the bonds."
Normally most governments would be rated as very safe, and some (like the UK) still are. This is what the commercial ratings agencies do - they assess how likely borrowers are to pay back their debts. They tend to get in the news for their ratings of government debt, but they also rate commercial borrowers (companies issuing debt etc).