'They are dogs with mighty appetites; they never have enough...they all turn to their own way, each seeks their own gain..each one cries, let me get wine! Let us drink our fill of beer! And tomorrow will be like today, or even far better.'' (Isaiah 56:11-12)
The sovereign debt crisis continues to make headlines from time to time since it first hit Iceland in 2008. The rising government deficits and their debt levels created wild swings and alarm in financial markets. The final true cost of a euro zone default is hard to estimate because of the huge amount of CDS (credit default swaps) involved. Greece debt crisis was the first euro zone crisis since its inception in 1999.
The Greek economy was one of the fastest growing in the euro zone from 2000 to 2007. (Remember Greece held the Olympics in 2004). This enabled it to run large structural deficits debt to GDP above 100%. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds prevailing at the time.To keep within the monetary union guidelines, it was reported that Greece had misreported the country's official economic statistics since 2001 by arranging transactions that hid the actual level of borrowing. The purpose was to enable them to continue spending while hiding the actual deficit from the EU. In 2009, the government revised its deficit from an estimated 6 to 12.7%. In May 2010 the Greek government debt was estimated at €216 billion. Though Greece represents only 2.5% of the euro zone economy, there is concern that a default by it can cause investors to lose faith in other euro zone countries as well.
There are glaring drawbacks in the economic integration model of EU. One of them is that though there is monetary union of some sort, there is no single common fiscal policy. As a result, weaker EU members can ride on the financial strength of the stronger members to enjoy advantages such as lower borrowing cost without having their fiscal policies been supervised. Cross border capital flows are also unregulated, creating problems such as asset bubbles and current account imbalances.
This debt crisis serves to remind us of our human sinful nature: GREED. The ‘attractiveness’ of engaging in ‘creative accounting’,manipulation of statistics using methods such as ‘massaging’ and derivatives, or ‘phony’ book-keeping by business entities (especially financial institutions) is always there because of potential financial gains. In US, the Fed by making the longer-dated bonds’ yield lower than the short-term bonds, the banks are finding hard to make money by borrowing short and lending over longer term. Banks may resort to creative ‘financial engineering’ to improve their profits instead. Such policy inadvertently encourages them to take unwarranted ‘risk-taking’, knowing that they will be bailed out by the taxpayers.
The sovereign debt crisis continues to make headlines from time to time since it first hit Iceland in 2008. The rising government deficits and their debt levels created wild swings and alarm in financial markets. The final true cost of a euro zone default is hard to estimate because of the huge amount of CDS (credit default swaps) involved. Greece debt crisis was the first euro zone crisis since its inception in 1999.
The Greek economy was one of the fastest growing in the euro zone from 2000 to 2007. (Remember Greece held the Olympics in 2004). This enabled it to run large structural deficits debt to GDP above 100%. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds prevailing at the time.To keep within the monetary union guidelines, it was reported that Greece had misreported the country's official economic statistics since 2001 by arranging transactions that hid the actual level of borrowing. The purpose was to enable them to continue spending while hiding the actual deficit from the EU. In 2009, the government revised its deficit from an estimated 6 to 12.7%. In May 2010 the Greek government debt was estimated at €216 billion. Though Greece represents only 2.5% of the euro zone economy, there is concern that a default by it can cause investors to lose faith in other euro zone countries as well.
There are glaring drawbacks in the economic integration model of EU. One of them is that though there is monetary union of some sort, there is no single common fiscal policy. As a result, weaker EU members can ride on the financial strength of the stronger members to enjoy advantages such as lower borrowing cost without having their fiscal policies been supervised. Cross border capital flows are also unregulated, creating problems such as asset bubbles and current account imbalances.
This debt crisis serves to remind us of our human sinful nature: GREED. The ‘attractiveness’ of engaging in ‘creative accounting’,manipulation of statistics using methods such as ‘massaging’ and derivatives, or ‘phony’ book-keeping by business entities (especially financial institutions) is always there because of potential financial gains. In US, the Fed by making the longer-dated bonds’ yield lower than the short-term bonds, the banks are finding hard to make money by borrowing short and lending over longer term. Banks may resort to creative ‘financial engineering’ to improve their profits instead. Such policy inadvertently encourages them to take unwarranted ‘risk-taking’, knowing that they will be bailed out by the taxpayers.
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