The Problem Of The Debt Crisis

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Statement Of The Problem
Europe is about to enter its third recession in the last three years, says The Economist. Prices fall in eight European countries, inflation fell to 0.3% and the region is prepared to deal with deflation and economic stagnation. The debt crisis in Greece has had a profound impact on the countries of the European periphery (Ireland, Portugal, Spain and Italy) but also had serious consequences for some larger countries because this debt was contracted primarily with French banks and Germans. At the same time, while the government promotes economic measures since 2010 to get support from multilateral agencies, millions of people are suffering the consequences of the crisis without consolation in the short term.
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This created a solid image of the Greek bonds that began to tremble with the financial crisis and the proximity of the maturity of the bonds issued by the government that must honor its debts on its home currency.
2) What does the data in the case tell you about the inevitability of the crisis?
Numbers in charts shows that government debt was growing above its GDP reaching 110% on 2008, which mean they was expending more than the economy was generating. Moreover, the disparity on the balance of payment confirms the low level of productivity that link with a high labor cost, the rise on social benefits and employees compensation are some basics element to speculate about a probable crisis.
3) What did the euro contribute to it? The genesis of the crisis was the decline in interest rates that followed the creation of the euro and the growing credibility of the ECB to maintain price stability. The low interest rates led to a strong expansion of domestic spending in countries where fee reductions were most pronounced: Greece, Portugal, Spain, Ireland and Italy. Moreover, in some countries the increase in spending was led by private spending and other by public spending. The result was an increase of the current account deficits, competitiveness deteriorated, price bubbles over assets created and the increased of external debt (Corbo, 2012).
4) Why did German and French banks lend so much at such low rates?
Lowering the rate banks
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