What will happen to the EuroZone Debt Crisis Now?
The EuroZone Debt Crisis Explained: How to Profit From A Further Collapse of the Euro Anyone who hasn’t been living in a cave for the last 6 months is probably aware of the fiscal disaster that has surfaced in Europe. It’s being billed as the Greek Debt Crisis by the media, but intelligent analysts, investors, and traders, understand that it is far beyond Greece. It is the European Debt Crisis. Let me give you a super basic history lesson on the Euro and how we got to where we are today, which is the possible demise of the Euro and the break-up of the EuroZone.
When the EuroZone formed in the late 90’s, Germany and France were the economic powers and every other country was clearly in a subservient position, economically speaking. When countries want to build roads, fund schools, and do various other large-scale projects, they fund this activity by issuing debt in the form of government bonds. Countries that are economic powers are able to borrow this money for pretty cheap. However, countries that are not in excellent financial shape have to pay more to finance their debt by offering investors a higher yield. Is it more expensive to borrow $100 for 1% interest or 2% interest. Of course, 1%.
Economically-weak countries such as Greece, Portugal, Italy, Ireland, and Spain were paying quite a bit to be able to borrow money. By joining the EuroZone, they were magically allowed to borrow money at very close to German bond yields. This means that because Joe is friends with Bob, even though Joe is financially irresponsible, he is able to borrow money cheaply and easily because he is friends with Bob. You get the picture.
So the grand idea when the EuroZone started was that these weak countries like Greece would be able to borrow money at cheap rates in order to economically develop their countries in a responsible manner. This would help them close the gap with stronger countries like Germany and France, and then all of Europe would grow more powerful. But, oh how the idealistic plans of man often fail in reality.
What went wrong you ask? Well, of course Greece, Portugal, Spain, Italy, and Ireland borrowed money. It’s what they did with the money, and how much they borrowed that became a problem. Instead of using the money to develop strong economic infrastructure in their respective countries, they went on reckless spending sprees. Imagine a college freshman with a new credit card and a mall 2 minutes from campus. That may be a bit of a stretch, but you get what I mean.
And so here we are 10 years later. These countries have spent so much money and developed such irresponsible fiscal agendas that they are now having trouble paying back all those loans. To make it worse, investors are now demanding more yield in order to hold the debt of these countries. That is making it even harder for the PIIGS (Portugal, Italy, Ireland, Greece, Spain) to pay back the money they owe. Thus, in the current Age of Bailouts, the EuroZone has come through and promised to loan these countries the money they need.
By: Richard Sobin.