Saturday, 15 May 2010

EURO hogwash - Solving problem with a problem

The Greek crisis has the origins in the excessives of the public expenditure without eye on the proportionate returns from it. What does that mean?

It means the exchequer has spent far more than it can afford to do so. That means the government expenditure far exceeds the income it earns. The crisis-because the income now cannot take care of repayments of debt raised for expenditure.

Till this, we understand what is going on. Now what has EURO package proposed?
  1. Balance of Payments facility to Euro members from 60 billion to 110 billion. that means more debt for the governments;
  2. Increasing Euro guarantees upto 440 billion in the form of Euro stabilization fund. where will this come from? from more debt.
  3. Finally IMF facility of additional 250 billion. this is not free aid. but more debt.

So what are we trying to do? we are trying to stave off the debt crisis by having more debt. so that we can roll over the debt. This means we are just trying to postpone the inevitability. But this is with the assumption that growth will return and the governments will have sufficient debt service coverage ratio.

Now what actions are we taking to make higher growth a reality:

  1. Tightening the belts by reducing the expenditure (public). In any country more than 20% of the GDP is directly or indirectly funded by the government. this action will have impact on the GDP of the country (more probably negative)
  2. This will have impact on huge liquidity surge in the markets as countries will be flush with funds (lower cost). This in return will result in high inflation.
Does anybody still think, we are resolving the issue? Comments please...