Greek crisis

Tosh · April 28, 2010

Sort of struggling with this a bit - in as much as I am trying to understand what Greece does next - and perhaps who is next. Us if you believe Cameron.

They ran a huge budget deficit - twice ours if you believe Gord - and effectively "hid" that within the Eurozone. Perhaps I'll find their €billions down the back of my sofa

They are now struggling to service the debt - in particular as their debt has been downgraded on fear of default and their borrowing costs are now at about 12% pa. Merkel has played hardball on saying they must reign in expenditure. Without coming over all UKIP, what's it to do with her?

Outside the €zone, they would let their currency slide to make it a cheaper place to buy from. They'd also likely put up their interest rates to make inward investment in their currency attractive (these two items being somewhat inflationary as they'd be printing cash - which Frankfurt won't let them do).

The €zone has a central interest rate to protect in part the currency and hopefully control inflation. Greece needs to deflate (monetarist) or inflate (keynes) their economy - likely they'll want do a bit of both by encouraging private sector spending/cutting Govt spending. Frankfurt is saying "slash expenditure)

What options does Greece have? Deflation seems to be Merkel's view, but in doing that, are they not then exposing other countries issues to the markets too (eg Portugal)? And certainly the Ireland experience seems to suggest a deeper/longer recession - which surely also harms the rest of the Eurozone?

Anyone help me clarify?

Mike · April 28, 2010