Bond-holders of the European peripheral nation’s debt increase their sensitive anxiety levels and willingness to loan (invest) when big ECB or piny EU signal that they aren’t guaranteeing the liquidation of the debt. In other word’s they ain’t that tight with their peripheral cousins as some might have thought. This is expectant and makes common sense.
I’m the first to admit that real economics and finance cause me head cranks almost as much as trying to figure out why we are here, where did the universe come, how did everything begin and what was there before it began? Anyways, not so much as that but the symptoms are related. What makes me boggle the brain is (maybe not so much but let’s dramatize) is why everybody cries out that the world is coming to an end when investors charge higher interest payments to buy bonds from the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) because of fear of default on their precious money. Why?
My brain tells me that government’s functionality must be completely dependent on debt. My farmer mentality would just suggest nations stop selling bonds, live with tax-payer receipts and EU welfare and curtail on unsustainable spending. Tighten the belt. Would this be a devastating shock on the economy, inflicting the citizenry’s life so much that riots, violence, and revolution would occur? Greece, Egypt, Syria, and other nations where pictures of rioters with flamed objects screen my mind. Guess so.
So I feel like there is a double-edged sword here. On the one hand the European community recognizes a huge structural problem in the peripheral nations where just liquidating the debt is not a remedy but a very short-term delay of the fundamental problems. On the other hand letting the insolvent nations fall on their knees and coincidentally incur huge losses on creditors will create a potential recession/depression accompanied by many, possibly destructive, negative internal effects and a negative economic paranoia might spread causing investors and creditors across the world to tighten up liquidity and become over-cautious and scrutinize every nation across the globe possibly causing more economic infernus. Is this mechanically an unacceptable outcome. Wouldn’t a little pain demand a more sound financial and debt system?
Taking this into account Merky&Sarkozy are trying to create a balance between solving the sovereign debt crisis with instilling structural changes by demanding austerity measures while the same time keeping the ping pong ball sliding on the racket allowing some commitment to keeping the default-able from defaulting. Is this safe or just destroying the little solutions that truly exist as some economic doctors suggest?
This is my take on things right now. This semester I’m taking a research class on the Global Financial Crisis so I hope to develop these thoughts.