What is the Origin of Euro Zone Debt Crisis

The debt crisis, or the crisis of the euro area that everyone's talking about what it is and where it comes from.

In simple words this is the explanation of why we have a crisis today, the economy of countries works very much as home economy: if you spend more than you earn then you are really in trouble.

What is the cause of the crisis

Interest rates were exceptionally low after entry to the euro in the countries of southern Europe and there was a boom in demand for credit from businesses and households.

Eveyone wanted money: individuals to buy homes and businesses to build them.
This reminds me: please do not borrow money and learn to live without credits.

Obtaining loans and mortgages from banks was very easy and that was what created the credit bubble that exploded with the comming recession in 2009.

Why Greece is in trouble?

Greece is a country that was living beyond its means, when they first became part of the European Community and adopted the euro, the Greek government was obtaining loans at an interest rate as low as Germany and that public spending exploded and got out of their hands.

Greek officials rose their salaries 50% between 1999 and 2007, much faster than in other euro area countries.

And while revenue came out of the state reserve, money ran away with tax evasion, a widespread practice in Greece, therefore after years of spending the deficit so high was out of control.

It is simple: money goes out but doesn't come in, what could happen?

In the 2008 crisis, Greece was not ready to cope. The debt reached such high levels that the Greek government could not pay loans and was forced to borrow huge emergency funds from the International Monetary Fund (IMF).

The strict conditions of the loans of the European Union and IMF aggravated even more the problems of the Greek economy.

How the Greek problem affects the rest of Europe

The european economy is inter dependent, that means that what happens to one country affects all the others.

If Greece fails to pay its debt investors, insurance, banks and other entities, investors will not invest in all the other countries at risk, such as Spain and Italy, and a domino effect will have an outstanding effect.

What will happen if Greece leaves the euro zone

If Greece leaves the euro area the government will reintroduce the old currency and the drachma immediately will lose 50% of its value against the euro.

Creditors immediately lose half of the investments, this would cause the bankruptcy of many European banks that are inter connected.
European banks rely on each other to finance, and lending between banks would stop suddenly causing a sort of economic infarctus.

The European Central Bank should act and give everyone as a last resort to avoid bankruptcy and the flood of investors and savers who were going to retire cash from their accounts.

Out of the crisis: the hope of Iceland

The crisis has no easy way out, but the Iceland model gives us all hope and it is a key model. When Iceland's financial system collapsed, the government immediately accepted an IMF loan to nationalize their banks.

Then the government implemented a strict change control to prevent a collapse of its currency and imposed heavy losses on foreign creditors, protecting local savers and investors.

Iceland chosed to save local depositors and investors at the expense of banks.

A key model for a healthy solution to the crisis.

What do you think?