Currency traders have recently been focused on the Eurozone debt problems. Economics professor Joseph Stiglitz and Hugh Hendry from Eclectica Asset Management sat down to talk about the current Eurozone crisis. The following two videos contain their conversation (hat tip to Zero Hedge). My notes/bullet points on the video are also below.
Notes:
* The Eurozone faces the dilemma between keeping its credibility or handing out bailouts.
=> European Union and ECB agreements do not allow for bailouts.
* Greece can’t use the typically-used tools to combat its debt problems:
1) Devalue currency (part of a currency union)
2) Decrease interest rates (controlled by ECB)
3) Print money (part of a currency union)
4) Buy back debt (no funds)
* As a result, a Greek bailout is the only option left (besides default).
=> A bailout would either involve guaranting Greek debt or debt forgiveness.
=> A bailout might generate moral hazard. Other PIIGS countries (e.g. Spain, Italy) might also expect to receive bailouts and stop taking action on their debt problems.
Stiglitz:
* Stronger European countries need to act in solidarity and support Greece.
* German support would make Greek interest rates come down and make it easier for the Greeks to service their debt.
* The new Greek government “discovered” the hidden debt.
Hugh Hendry:
* Greece never saved any money during the boom times.
* The Greek debt is too large and cannot be serviced by its economy.
* Greece has lied about its debt for the past 6 years.
* Greece needs to default or be granted debt forgiveness.
Overall, selling any Euro rallies is probably still the best bet.
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