I know I'm oversimplifying it, and I'm sure Rob will correct me, or at least clarify some stuff, in the comments section, but is this situation really expected to be solved with more debt? Or is it just to buy time? Or is there another answer?
In my eyes, the bailout is a signal is investors, traders, speculators, whomever, that the eurozone will survive and become stable. And tt was a strong signal, just look at yesterday's equities performance.
But does it change anything fundamentally? Or is this thing just a really, really big Band-Aid for a patient with terminal cancer? Is painful chemo (revamping of fiscal austerity measures) the only real solution? (sorry for the horrible analogy).
It's way too early to tell.
Subscribe to:
Post Comments (Atom)
Actually, I think you said it better than I could. It's a question of illiquidity vs. insolvency. If Greece is really just illiquid, yes debt and buying time will work, however, if it's insolvency... More on this if I have time. Maybe this weekend.
ReplyDeleteRob, I know this is a heavy-duty question, but what do you think are the key indicators that would demonstrate whether this particular situation is more solvency-related or liquidity-related?
ReplyDeleteThe problem here is there is no definative answer to the question of solvency. If a firm, bank, household, or country's assets are greater than their liabilities they are solvent. If the assets are long and illiquid, but still greater than the liabilities they are still solvent, but determining the worth of those assets is tricky work because assets change price all the time and often quite rapidly.
ReplyDeleteAdd in on top of this a bank-run-type feedback loop from speculators and things can go from illiquid to insolvent very quickly. I'll do some thinking and digging and try to lay my thoughts out in a more structured post, hopefully this weekend.
Off the top of my head I would be looking at the social welfare programs and automatic expenditures compared to revenues. What we are seeing in Greece is that the Government over extended itself because joining the Euro gave it access to the same low interest rates that low inflation countries (Germany) enjoy without attempting the same fiscal responsibility of Germany et al.