In the boom years before the credit crunch, people and countries were maxing out their credit alike. In the same way when life is good you enjoy it to the max – expensive parties, holidays, houses and women… Credit cost little for everyone, even countries.
Then the banks, pissed out of their minds on success, started loaning mortgages to families with no hope of repaying. You intentionally create a large bad debt and the creditor suffers. In order to soften the blow to individual banks they sold good debt and bad debt on to other banks packaged up together as financial instruments similar to stocks and shares, so they believed they could earn money on the repayments. Problem is, enough debt went bad and enough banks had bought the debt that went bad that a global financial crisis blew up. The financial instruments were a con job. Banks went under.
Banks are the engines of the economy. You must speculate to accumulate, so the saying goes. Banks help people speculate. Banks fighting for their own financial survival aren’t going to help customers speculate. This was the chief impact – only people with gold plated credit histories and solid job prospects could get a mortgage, and the property boom became a bust. Not lending to businesses in times of financial drought, so businesses could not speculate, or even survive and many people globally lost their jobs. The world has a global economy – America has a recession and the rest of the world suffers. Europe suffers as well? The two biggest global economic blocs really screwed up the global economy.
What also happened is countries had to buy banks up that were about to go bust. The UK government owns its 3 previously most successful banks. This sent the country’s debts from billions of dollars to well over a trillion. That is, $1, 000, 000, 000, 000. Other countries that weren’t at the top table of the world’s economy had to do the same. Where the likes of Italy, France and Germany make Europe what it is, Greece benefits from their firepower in the same way as a geek makes friends with a big guy at school to avoid his underwear being hoiked round his ears every lunchtime.
Countries had to borrow to ensure their banks survived. Problem is, in Greece’s case it borrowed more than it could afford to repay. Over the last year its finances have been in a state where a human being would go bankrupt. Even a wealthy human being going bankrupt will cost his creditors a million or two. Not much? It ain’t much when his creditors are worth tens of billions of dollars. Problem is Greece owes something like $150 billion. It is paying over $10 billion a month in interest alone. Its economy has gone tits up as it has sacked many government employees to save costs and they aren’t paying tax. The world recession means the economy isn’t growing and Greeks aren’t paying enough tax to cover the repayment.
Scared Greece will go under, its creditors boosted the interest rates it had to repay to recoup more of the debt quicker in case it defaults. Greece now pays more on its debt than I did on certain credit cards in the boom years.
More to the point, banks in Italy and France share the bulk of the debt. You look at a government bond in normal times and it should be gold plated – you are guaranteed a good return and it to be repaid in full. This ain’t normal times!
The International Monetary Fund is now talking of a ‘partial default’. This means Greece will stop repaying around $75 billion of debt. Most banks don’t earn that in a year! In order to do a ‘managed default’ of half its debt, so a bail out package is being arranged by other Eurozone countries to repay the banks losses when Greece goes tits up. The banks will survive. One of the three biggest economic blocs in the world will survive.
Problem is at the minute, banks trade their debt globally. French and Italian banks are being looked at closely to see who has loaned what to them. The banks’ creditors will hoik up their interest rates or not loan more to them in case they go under. With the Credit Crunch in vivid and recent memory, so banks the world over are tightening their belts. This impacts on you in Australia and me in the UK alike. Banks tightening their belts impacts on economies.
It doesn’t help that Italy is in a mini financial crisis in its own right. If Greece went under without a ‘managed default’ Italy would go under. Italy is the world’s 8th richest economy. Being a global economy Italy trades with lots of other countries. Greece is 33rd – not even in the Premier League. Italy is at the top table. Italy goes tits up most countries globally will feel the love and a new Credit Crunch will hit.
You line up a load of dominoes in a line and flick one? Now, set those dominoes in a complex pattern so one in the middle goes down and all the others fall. That’s the global economy in a nutshell.
Complex? This is as simple as it gets! That is why the world’s 33rd richest government going under can stop a sheep farmer in central Australia getting a mortgage. Scary, but true…