Eurozone officials have developed a $1-trillion stimulus plan in an attempt to prevent their economies from falling into an economic black hole. Such policies can only make things much worse. FULL ARTICLE by Frank Shostak
Source link: http://archive.mises.org/12744/the-eurozone-stimulus-package-and-economic-fundamentals/
The Eurozone Stimulus Package and Economic Fundamentals
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“What they mean by stabilizing the markets is to suppress the widening of the yield spread of the Greek, Spanish, and Portuguese government debt against the German government debt. For instance, in April the spread on the 10-year Greek government bond stood at 6.2% against 3.7% in January while the Portuguese spread stood at 2.4% against 1.2% in January.”
I really enjoy reading articles on this site, and I really enjoy learning the truth about economics and current events surrounding economics in the world. However, statements like the above make my eyes glaze over, because I have no idea what the author is talking about. I know it’s due to my ignorance on this subject, but I just want to point out that an article such as this, although very valuable I’m sure, is not an article I can forward to any of my friends to help them understand what’s going on in Europe with their financial crisis…because we don’t understand what the author means by “yield spread”, nor are we able to comprehend the percentages the author talks about.
All it means is that when the spread widens there is a greater risk of default factored into the trade of securities.
David, this is the link to another article on Greece which you might want to look at.
http://www.lewrockwell.com/orig11/copperwaite1.1.1.html
The key link between all of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) is that, before joining the Euro, they all had a history of high interest rates which actively restrained their governments’ ability to overspend. The cost of borrowing was just too high. The moment they joined the Euro that restraint disappeared. This article focusses on the original twelve members of the Eurozone, whch were France, Germany, Italy, Spain, Ireland, Austria, Belgium, Luxembourg, Finland, Holland, Portugal and Greece. Subsequently, four further countries joined the Eurozone. They were Cyprus ( approx population 800,000), Malta ( approx population 400,000), Slovakia (approx population 5,500,000) and Slovenia ( approx population 2,000,000) making 16 member states in total.
In the Euro zone, all countries issue bonds, borrow money, in Euros.
So if there is difference between the interest rates of the bonds of Germany and Greece this can only be due to the risk factor, where if they used different currencies you could also look for an inflation premium.
So two countries using the same currency but having very different risks on the supposedly safest assets, government bonds, is a very serious issue and it naturally causes panic.
Say the German government wants to boorw money for 10 years and offers 3% interest. If investors buy the bonds at par, the German rate is 3%.
Say the Greek gov’t wants to borrow money for 10 years and they offer 8%. If investors pay par for the bonds, the Greek rate will be 8%.
The “spread is simply the difference in rates (8% – 3% = 5% spread).
Note that if Greece only offered 3%, investors might only offer 90 cents on the dollar (or, rather, the euro), thus forcing the yield to the market rate of 8%. (I’m guessing on the math here)
David, there is a less technical article by Gary North today at LRC on this topic. He throws around some deficit/GDP percentages, but those are easy enough to comprehend.
http://www.lewrockwell.com/north/north844.html
Thanks Daniel!
Government overspending makes us all rich!
http://finance.yahoo.com/news/Why-Rand-Pauls-Win-Is-A-siliconalley-1205890649.html;_ylt=AuwfHjIbxa5b_CSBCxd6hIC7YWsA;_ylu=X3oDMTE1dDVwanZoBHBvcwM4BHNlYwN0b3BTdG9yaWVzBHNsawNyYW5kcGF1bHN3aW4-?x=0&sec=topStories&pos=6&asset=&ccode=
Unbelievable!
I just wanted to give a big thank you to all of you that responded to my comment (the first one at May 19, 2010 at 9:08 am), and attempted to help me better understand this topic. That’s the great thing about this community, 99% of you are all very kind and supportive, and you’re always willing to help people understand some of the more difficult to grasp concepts concerning economic, and even non-economic, issues.Kind regards,David
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