Exam I - test prep - Finance 415 Exam I Review Questions...

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Exam I Review Questions General Questions – 1. We have discussed the debt situation in Greece on several occasions. Please briefly summarize the background of the debt situation in Greece, the current proposal on the table, and possible outcomes. (In addition to what we have discussed in class I’d like you to do some background reading/research on this issue. What is happening in Greece is of significant importance to Greece, Europe, the United States, and ultimately the global financial system). Greece has been living beyond its means since even before it joined the euro. After it adopted the euro, public spending soared and public sector wages practically doubled. Greece cut the pay of its public workers — a quarter of the work force — by 10 percent — but continued to miss deficit targets as its economy sank deeper into recession. Billions of euros of bailout loans and writes offs were given to Greece which still wasn’t considered enough. So, in 2011 the Eurozone got banks to agree to reduce some of Greece’s debt by 50%. Greek politicians have recently approved a bill on austerity measures needed for a new bailout. Proposing a 20% cut to base payy for workers in private companies and a loosening of public sector job protections. Many thinks that by making people poorer the measures will simply shrink the Greek economy by reducing tax revenues and increasing the deficit. But EU leaders insist that there is no other choice, the spending must fall even if it hurts the economy in the short term. The European debt crisis not only affects our financial markets, but also the U.S. government budget. Forty percent of the International Monetary Fund’s (IMF) capital comes from the United States, so if the IMF has to commit too much cash to bailout initiatives, U.S. taxpayers will eventually have to foot the bill. In addition, the U.S. debt is growing steadily larger – meaning that the events in Greece and the rest of Europe are a potential warning sign for U.S. policymakers. Greece must persuade its creditors to take a hefty loss on their investments in order to unlock the aid money it needs to stay afloat, but talks are proving tough, making a messy default in March a real prospect. Below are some of the possible outcomes of the talks: GREECE SECURES A VOLUNTARY DEAL If Greece can reach a deal with creditors on terms of a debt restructuring, private creditors will voluntarily swap their Greek bonds for new ones worth around half their original value. GREECE SQUEEZES HOLD-OUTS If Greece cannot persuade enough bondholders to sign up to the offered terms on a voluntary basis, it could turn to legal options to force those resisting a deal to swap their bonds. TALKS END WITH NO AGREEMENT
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Exam I - test prep - Finance 415 Exam I Review Questions...

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