A Dummy’s Explanation of the Debt Crisis and Greece

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Here we have the quick explanation of what is going on the in the news and what exactly the debt crisis means today besides the obvious possibility of all of us going broke tomorrow. Psych! On a more serious note, this is what the BBC, CNN, Sky News, and you name it is talking about.

On October 27th, the euro-zone leaders emerged with a modified rescue plan for the debt crisis plaguing Europe. This new plan has three important elements to it. First, reduce Greece’s debt to a bearable level by a “voluntary” agreement with private creditors to accept the loss of half the value of the bonds in exchange for safer debt. Dummy terms: half of Greece’s debt written off in exchange for a promise of safer government bonds. Second, recapitalize Europe’s banks to the sum of €106 billion to help them deal with Greece’s losses. Dummy terms: the banks should build up their capital by selling shares. Finally, to create a €1 trillion firewall to prevent havoc in the international markets and its negative impact on other vulnerable EU members; primarily, Italy. Dummy terms: 1 trillion euros worth of keep calm and carry on. (The Economist, volume 401, number 8757)

On Monday, November 1st, George Papandreou, Greece’s Prime Minister, surprised the euro-zone leaders by announcing a referendum to take place in early December putting the decision to the hands of the Greek people. The EU’s leaders, in other words Germany’s Angela Merkel and France’s Nicholas Sarkozy, were bewildered by Papandreou’s decision. Mr Papandreou is essentially playing a very risky game of chicken with the Greek people. In all simplicity, the referendum will decide whether or not Greece will accept this rescue package in exchange for the promise of extreme austerity measures. However, the focus of the referendum has now shifted towards the broader question of whether or not Greece wishes to remain in the EU. Should Greece accept the conditions of the rescue plan, they are committing themselves to years without economic growth and austerity measures increasing taxes from all directions and serious cutbacks on social welfare costs. Should Greece reject the plan, they are rejecting the ultimatum from the EU to accept the rescue plan terms or leave the EU.

Mr Papandreou remains confident that the Greek people will vote in favour of the referendum. However, the panic that we see today in the G20 conference in Cannes, France is the speculation that Greece may or may not still remain members of the EU and the negative consequences that can have on other debt-ridden countries of Europe. The “haircut” trim of 50% of debt owed to private investors by Greece would surely help Greece in the nearer future, but the question remains, is bankruptcy inevitable? Should the leaders of Europe accept the reality of bankruptcy and have a “contained” bankruptcy or will they exhaust every possible option until they have an “uncontained” bankruptcy?

For further explanation, please address the School of Economic as this student has absolutely no idea.

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