Greek Deal - How the Contagion Could Spread

Well, it looks like Europe got its act together at the last minute and put off the ugly end to the Greek crisis - at least for now.  Although, the details that make up the deal have yet to be released or have opened up a new bag of questions.  Below is a good graphic from the New York Times shows how the Greek crisis could affect the world - good teaching tool. 

Multiple Equilibria in Crisis

Greg Ip has a good post reporting on the idea that in a currency crisis (or other similar crisis) there can be multiple point of equilibria.  As he says:

Courtesy of the Bank Credit Analyst, it nicely illustrates the dilemma facing euro zone peripheral sovereigns. In normal times (upper part of the chart), demand for Italian bonds is downward sloping. As prices fall (yields rise), demand rises. But at a certain point, higher yields call into question Italy’s solvency, and demand actually falls. In this zone of vulnerability, the demand curve is upward sloping. Only once Italian bond prices fall into distressed territory, presumably at much lower deficits and levels of GDP, does the curve resume its normal shape.

The BCA writes:


The possibility of speculative attacks blurs the distinction between liquidity and solvency. As a result, there may not be any single unique “equilibrium” for debt yields. Rather, debt markets may be subject to multiple equilibria … In such an environment, shifts in financing costs can lead to a wide variation in the possible trajectories of debt-to-GDP ratios over time, which serves to exacerbate market anxiety. Faced with such multiple equilibria, it is a central bank’s responsibility to ensure that the “good” (i.e. low yield) equilibrium is reached. The fact that the ECB has yet to grasp this lesson is bewildering.

Eurozone Public and Private Debt

Floyd Norris in the New York Times has a good article comparing the levels of public and private debt in eurozone countries.  The article makes the point that the amount of private debts in these countries is important in the current crisis because it directly affects the ability of these counties to grow their economies (which is harder if the population is trying to dig itself out from a pile of debt).  The article also has this good chart:

Rich and Poor in Europe

Throughout the euro crisis the discussion has been around the rich and poor countries. However, that division is not quite honest. The reality of rich an poor in Europe is regional. The magazine Spiegel has posted a great map showing the income (based on GDP per capita) for the different regions of Europe.

Deadbeat Germany - Historically Yes!

The German online magazine Spiegel has a great article that should humble Germany's demands for Greek, Irish and Portuguese austerity. It makes the case that in the twentieth century, Germany was a major defaulter and depended on other countries absorbing its losses - i.e. taking "haircuts". It is a good historical perspective that shows that Germany does not have a financially righteous past - but is really a reformed sinner.

Interactive Euro Crisis Map

The New York Times has a good set of interactive maps of the Euro Crisis. The crisis seemed to be heading to some type of resolution this week until Germany changed its mind on forcing some of the losses on bond holders. Now it appears that bond holders will be protected and the crisis has been pushed down the road. However, the crisis is far from resolved - it price tag has just been pushed more on the European taxpayers. The big lingering question is when this crisis will explode. The maps are informative.

Euro in the News

Two sources of views on the current Euro Crisis. First, Paul Krugman on the Euro from Fresh Air. Below is Paul Solman on the PBS News Hour:

The Winner is Germany

An article in the New York Times makes clear how much Germany, compared to other eurozone members, has gained in growing exports since the creation of the euro. As the chart below shows, Germany has gained at all levels - and might gain more as the euro falls in value.