During the summit held in July 2011 the EU leaders worked out further measures to overcome the Greek debt crisis. They promised to provide Greece with another loan (09B) in exchange for austerity measures. However, the economic losses caused by lower supply and demand should be compensated by something. Otherwise, the unemployment rate will keep growing and the budget will not see any inflow, thus making financial aid useless. Besides, the European Union cannot lend Greece forever as there are some other eurozone states that need attention and help.
The only way out is to restructure all the Greek debts and some debts of other eurozone states. However such steps may seriously damage the financial system of the entire European Union (in this case there will be no economic growth in Europe). The cumulative debt of the PIIGS states is equal to i?? 3 trillion. Public debt (% of GDP): Source: Eurostat In absolute terms Italy and Greece are the main debtors. Even in global scale they yield only to the USA and Japan. Euro currency propects The situation is so difficult that even healthy EU economies have to cut their budgets, which doesn't sound reassuring.
European banks hold a lot of bonds issued by those countries that are on the verge of default. At the same time the EU's major and peripheral states cannot solve the problem due to some economic and cultural disagreements. 1. European Central Bank's policy. Only a single financial policy can save the common currency. However, there is still no such policy. Consequently the ECB should keep lowering interest rates and buying the T-bonds issued by the debt-ridden countries. 2. China as a lifesaver. China might put substantial amounts of money into the debt of troubled euro-zone borrowers.
Not only does China have a lot of money to invest, but it also gains a lot politically by helping Europe in its hour of need. 3. Joint efforts to combat the crisis. The only way to save the eurozone and the common currency is by joint actions and cooperation between the EU's powers. However actions should include numerous painful reforms. If the expenses are evenly distributed between all the EU members, it will probably help to avoid further social and political tensions and to preserve the integrity of the eurozone and the entire EU. The eurozone's instability cannot but affect the common currency.
According to specialists, since late August the Euro currency has been losing its value against the US Dollar. 7. THE U. S. SUBPRIME MORTGAGE CRISIS The U. S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. The ratio of lower-quality subprime mortgages originated rose from the historical 8% or lower range to approximately 20% from 2004-2006, with much higher ratios in some parts of the U.
S. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products. Further, U. S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related. After U. S. house sales prices peaked in mid-2006 and began their steep decline forthwith, refinancing became more difficult.
As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U. S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U. S. and Europe.
Causes The crisis can be attributed to a number of factors pervasive in both housing and credit markets, factors that emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending, and speculation), overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, bad monetary and housing policies, international trade imbalances, and inappropriate government regulation.
Three important catalysts of the subprime crisis were the influx of moneys from the private sector, the banks entering into the mortgage bond market and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2-28 loan, that mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes. Boom and bust in the housing market
Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. The USA home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69. 2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher. As more borrowers stop paying their mortgage payments (this is an on-going crisis), foreclosures and the supply of homes for sale increase.
This places downward pressure on housing prices, which further lowers homeowners' equity. The decline in mortgage payments also reduces the value of mortgage-backed securities, which erodes the net worth and financial health of banks. This vicious cycle is at the heart of the crisis. Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26. 4% less than in the preceding year. By January 2008, the inventory of unsold new homes was 9. 8 times the December 2007 sales volume, the highest value of this ratio since 1981.