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Unformatted text preview: Articles/Collab Readings George Soros The Crisis & the Euro Origin: bankruptcy of the Lehman Brothers and financial market collapse of 2008 o Response to this crisis was artificial life support consisting of substitution of sovereign credit for the credit of financial institutions that had ceased to be acceptable i.e. bailouts Soros proposes a two phase maneuver to solve crisis o First phase: avert collapse - pump credit to replace credit that had disappeared, thereby reinforcing excess credit and leverage that had caused crisis Essentially turning a skidding car in the direction of the skid to correct the course This was successful in 2008 collapse has been averted However, the underlying causes have not been removed and have surfaced again with the current situation with Europe Thus, the euro crisis is derived from 2008 crisis The problem now is doubts about sovereign credit are forcing reductions in budget deficits at a time when banking system and economy need stimuli o Second phase: getting the economy on a new, better course o Right now, however, second phase is running into difficulties such as: o Europe weathered the first phase of the crisis well, but is now causing the downward pressure because of problems with common currency Incomplete currency to start with - Euro boasts a common central bank but lacks a common treasury Missing a sovereign backing o When it comes to sovereign credit, countries are on their own This problem emerged wen European Central Bank (ECB) decided to accept debt of al member countries on equal terms at its discount window. o This let countries borrow at same interest rate as Germany o Banks happily loaded up balance sheets with the debts of weaker countries o Ex: European banks hold nearly a trillion euros of Spanish debt European debt crisis is thus interconnected with Euro bank crisis o How did this connection arise (debt crisis and bank crisis)? Intro of euro brought narrowing of interest rate differentials Generated real estate bubbles, making countries grow faster and develop trade deficits within Eurozone Some of these countries (Greece) ran budget deficits that exceeded limits set by Maastricht Treaty ECB let them continue borrowing o Big snowball from there o Big problem each country had to take care of its own banks Capital fled from countries that couldnt promise not to default, but differences in interest rates on govt debt remained minimal Led to problems in Eastern Europe Problem with accumulation of sovereign debt started with Greece Interest rate differentials started to widen, but no countries reacted o Thus, Greece crisis festered and spread o Rescue package was then much larger because authorities hadnt acted sooner o All this leads to establishment of a 750 billion euro European Financial Stabilization Fund Problem: weaker countries will be guaranteeing a portion of their own debt...
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- Fall '11
- The American