Economics article writing on: Greek Crisis
The article “Two years after the crisis began, a Greek exit could still cause havoc” was published in The Economist on 19th May, 2012. This article majorly highlights the Greece crisis along with the exit of Greece from the European economy. Due to an inconclusive result from the first election which was held on 6th May had to be rescheduled for another poll in the month of June. The main trigger which was seen was in regards to the rejection of the Greek amongst the austerity program.
The events could move a little faster if and only if the Greeks would start voting their mouse & begin a bank run. Run these days do not mean that the people would line up as well as with draw cash. These days the transfer of cash along with stocks, bonds & assets is being done with the help of a click of a button. It has been estimated that, in the past 2 years the banking system has lost approximately one third of the entire deposits. There are various types of indications which could be seen in regards to trickle of the deposits (Todaro, 1987).
The president of Greece, Mr Papoulias announced on 14th May that, they have been warned by the Central Bank that people had withdrawn approximately €700m ($894m) from the various banks based in Greece. It has been seen that, reliable figures will not be forecasted whereas €1.2 billion was flown out of the bank on 14th May & some of the days after that (Todaro, 1987). It has been said by the bankers that, continual outflow of money but a slow pace. Based upon the report prepared by one of the leading Banks situated at Greece states that, there is an increase in the overall withdrawal as well as small depositors who do not want to make out as to what is to be said to its customers in order to provide them with a moment of relief.
One of the greatest potential which could be seen with respect to the levels of deposits which needs to be spread across the various vulnerable countries such as Spain, Portugal, etc. One of the typical things which shall be taken into consideration refers to the trickledown effect along with the proper flow of the currency. Amongst the real concern it shall be kept in mind that, firstly dam breaking shall be practiced in Greece. It has been seen that, the households in the other countries apart from Greece have the tendency to leave their deposits wherever they are. It has been seen that, the big companies have been sweeping the money out of the tangential banks as well as countries. The local government bodies of Britain have started moving their deposits from the British banks through supervision & capitalization (Mishkin & Frederic, 2012).
It has been clearly stated within the article that, the short term task to nullify the suns just before the poll. Based upon the authorities it is judged that, the authorities will be able to restore the levels of confidence which would inject the banks located within Greece with approximately €48 billion of newer capital which would help in maintaining fair levels of financial stability amongst the European Central bank (ECB). The European Central bank would be quite helpful in stopping the various types of monetary policy within the banks situated in Greece.
Europe & Greece are unable to hold the election which would leave the possibility that Greeks might vote for the government which might plan to leave. Therefore, the bankers situated in Greece are praying that nothing of this kind happens. According to one of the Greek Bankers it has been stated that – “Leaving Euro would be regarded as a nightmare”. The financial cost associated with the exit of the Greek economy would be to manage the creditors as they are quite more in number. Undoubtedly, the biggest losers in the exit of Greece would be referred to as the tax payers. It is estimated that, the Greek banks owe approximately €100 billion to the central bank who are the members of the Euro. It has been seen that the ECB would take up loss for approximately 65 billion Euros from the Greek government bonds. The members of the Euro Zone would keep in mind the International Monetary Fund (IMF) which would help out the Greece in repudiating its bail out loans.
After the financial contagion, the banks would be able to have a direct exposure with Greece. Even after having values of the government bonds & swapping it with bonds associated with lesser or equivalent price. The European bank as well as the investors at the moment holds approximately €55 billion of government debt according to the Berenberg Bank.
It shall be seen that, sovereign not only refers to the debtor in Greece. Based upon the Bank of International Settlement it has been seen that, the foreign banks still owe $69 billion by the households as well as the companies situated in Greece in the year 2011. The riskiest economies refer to France then Britain followed by Germany with the exposure of households i.e. $37 billion, $6 billion & $8 billion respectively (Trevorw, 1956).
One of the greatest risks which have been faced by the European financial system is in regards to the contagion which has been spreading beyond Greece. The country which would be at stake & at the most riskiest position with the exit of Greece refers to Cyprus. It is evaluated that, Cyprus would be affected the most due to the fact that, the financial system is being intervened by Greece. With the exit of Greece, it has been seen that the banks situated in Cyprus would lose high levels of capital which would lead to 50% increase in the entire GDP of the country (Todaro, 1987). GDP[A1] has been defined as the market value of all the goods & services produced in a given period of time. GDP has been referred to as an indicator which portray sthe standard of living within a given economy.
Borrowing high levels of cost from Spain & Italy would lead to an increase in the overall response of Greece which would lead to an irritated as well as frustrated attempt amongst the Spanish government. This would help in order to reassure the investors regarding the state of the banks. The crises faced by Greece have been hovering for the past two years. The policymakers who have taken part within the entire crises would take up weeks or less to solve the entire crises.
The main cause of worry within the Greek exit is in regards to the fact that, the markets shall focus on other & bigger exit countries. The two countries which are in line are Ireland as well as Portugal. It has been seen that, the borrowing cost associated with Spain & Italy has been rising constantly with response to the worries over Greece. According to the article it can be seen that, shares in Bankia crashed on 17th May & the depositors took out approximately €1 billion from one the Spanish lender (Negate, Santi & Tench, 2010).This article which has been discussed above in this also takes into consideration the functions of central bank, definition of monetary policy, monetary policy tools & limitations of monetary policy. At[A2] the time of crises the crucial role is being played by the Central bank of any country. For example, in this regard the Central Bank or Reserve Bank of Greece would be highlighted. Some of the functions which shall be played with Central Bank refer to manage the money supply with the help of monetary policy, proper management of the interest rates shall be practiced, setting of the reserve equipment as well as keep some amount which would help at the time of financial crises of insolvency (Robet, 1956). Central Bank at Greece would have certain types of powers which would help in order to keep a track record of the money which is being misused within the economy[A3] . The various activities as well as responsibilities which shall be kept in mind by the Central Bank of Greece in order to settle down owes, pay off all the lenders have been discussed as under. They are implementation of the monetary policies, to determine low rate of interests, have control over the money supply of the same, regulate as well as supervise the entire industry, setting off the interest rates & manage the reserves of the country’s exchange (Moyer, McGuigan & Harris, 2010).
Monetary policy refers to a tool which would help to control the rising inflation in any country. With the help of the monetary policy, the central bank at Greece would keep their lending rates a bit low as compared to the normal lending rate practiced by the same. The[A4] low inflation rate would be termed as one of the most dangerous aspects for the economy. There are various methods which have been suggested to the economy of Greece which would help to reduce the level of inflation (Mishkin & Frederic 2012). With the help of Federal Reserve, inflation in the Greece economy could be controlled to a certain level. This could be done with the help of keeping the interest rates at much higher rates & other operations. High interest rates with slow rate of growth in case of the money supply refer to the two traditional ways with which the rate of inflation could be controlled up to a certain level. According to the monetarists, it could be seen that greater emphasizes is given to keep the growth rate in case of the money supply in a much defined manner. Whereas, on the other hand Keynesians put major stress to reduce the levels of demand while increasing the demand even at the time of recession in order to stabilize the levels of inflation[A5] . Control over rising inflation could be made with the help of both the monetary & fiscal policy (Arthur & Sheffrin, 2003). Some of the tools which shall be used by the Central Bank of Greece in order to manage the currency of Greece shall be too use monetary as a base, discount window lending, manage the rate of interests, reserve requirements & peg the currency with some other currency which would help in backing up the currency levels.The[A6] concept of inflation can be seen with respect to one of the articles published in The Times of India with the headlines “Inflation highest in one year”. It has been seen that, the prices of metal as well as the food items led to an increase in the inflation levels by approximately 6.68%. After proper evaluation it has been concluded that, there was a rise in the rate of inflation by 0.76% within a week. The concept of inflation has been well described within this article. Analyst states that, due to rise in inflation RBI might not go for a soft monetary stance as the Central Bank is expecting to tighten the rate of interest policy. The government of India will take up certain fiscal measures which would help the Indian economy take up the rise in the price levels.
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