As the past week's tumultuous and disconcerting events on Wall Street demonstrated, the fate of Greece is indeed relevant to not only the health of Europe's economy but also the U.S. economy, due to the financial ripples and shock waves that could result if policymakers fail to address the Greek situation correctly. The decline and fall of financial giants Bear Stearns and Lehman Brothers, although without question rooted in their dubious, high-risk business practices and extremely overleveraged positions, were nonetheless accelerated by today's bond vigilantes. In the recent financial crisis, bond vigilantes shorted the now-infamous subprime mortgage-backed securities, many of which were vastly overvalued based on the false assumption that the subprime borrower category would have low default rates.
Now, the bond vigilantes are selling and shorting -- and in some cases, refusing to "roll over" -- investments in sovereign debt: the bonds issued by the debt-plagued governments of Greece, Portugal and Spain, among others. And that's weighing on investor confidence and roiling the markets.
The problem with the "leave the euro" solution is that it by no means is cost-free or ripple-free. Creating new, softer currencies that are by their very nature worth less than the euro implies that those banks and institutions that lent money to Greece, Portugal and Spain are probably going to paid back in currencies that are worth less -- thus decreasing the value of the investments. Lenders and investors want their money returned in hard currencies -- euros, dollars, pounds, Swiss francs or yen -- not in currencies worth slightly more than gum wrappers. Hence, any "leave the euro" plan would almost certainly send another shock wave through the world's stock and bond markets as they reacted to the likelihood of investments in those troubled countries losing value.
No comments:
Post a Comment