Greeks economy is facing the threat of sinking into recession. Its debt is threatening the world’s economy and the Euro zone countries are weighing options to resolve this issue. Banks, private creditors, financial institutions target to bear up to 50% affluence of this debt. The EU is also considering using the European Financial Stability Facility (EFSF) as they try to get a coordinated approach on recapitalization. Political instability in some of its member states worsens the situation. Investors have little faith in political leaders’ ability to solve the problem as they have failed to deliver in the past. However, some have faith that the promises they have heard will come to be, and help solve the problem.
Greeks economy is sinking into a recession. Recession describes the economic status of Greek. Its economy has been facing a period of unsuccessful economic times, and this has sunk it into a lot of debt that it cannot pay back. Recapitalization is the act of restructuring the country's debt by changing its capital structure and increasing its reliability. The EU plans to use the European Financial Stability Facility (EFSF) to stimulate the financial stability of Greek. Their interest in restoring the financial stability of Greece is because they use the same currency, euro, and the debt owed by Greece will affect the price of the currency in the global market making all the member states fall into recession. The EU members are not willing to go back into recession as they were recently battling out of it.
The world’s economy is under a serious risk due to the economic instability in Greek. Economy consists of resources that can be used to generate income. A country's economy depends on the inflation rate, growth domestic product and national debt. The national debt is threatening the Greek economy, and this has an enormous impact on the economy of other countries. The world’s economy is also threatened because the banks and private creditors have to bear the burden of this debt. This will hamper the abilities of the banks to pay its dividends making it difficult for them to raise any capital to be used in recapitalization. The EU leaders are asked to think of ways to help resolve the crisis in Greece, in the hope that reviving the economy will strengthen the euro value in the international prices because the dollar is gaining.
The article is mainly about the Greek debt. Debt is the total amount of assets and financial obligations to another country. Greek is indebted to many European countries and is unable to pay back its debts. It is constantly sinking into more debts predictions shows that it will owe up to 357 billion by the end of the year. Greek is obligated to creditors who give them money. It means that Greece is under the obligation to pay these creditors back what they owe, but due to its economic instability, they are not able to pay their debt. The banks are also affected by this debt, as they have to bear the burden of losing up to 50% of their profits.
The banks will be affected significantly if the EU decides to prevent them from paying dividends to its shareholders. A dividend is the percentage of earnings earned in a specific period that has to be given to the shareholders. This is from the transactions that the banks make. They calculate the profits they have made and divide it among the shareholders. This according to the German banking association will restrict the accumulation of capital.
Dividends play a vital role in raising capital to continue investing. Capital is the money or products used by business people or a nation to generate income. In this case, the dividends paid by the banks are the capital required by the shareholders to go into businesses in order to make more money. Greek lacks the capital required to invest in order to make more money to pay back the debt that keeps on piling. The banks in Greece might be required to stop paying their shareholders dividends in order to regulate the money that is used by people. However, this might affect the banks negatively as the shareholders may decide to dispose their shares meaning that the banks will require the capital required for its smooth running.
The investors in Greece are the people who go into businesses with the hope of getting financial returns on their investments. These people run the risk of encountering loses if the EU does not find a quick and lasting solution for the crisis in Greece. The foreign investors are no longer confident with the economy of Greece, and most are not willing to invest in the country. The investors are worried about the euro as a delay in finding a solution for the Greece crisis will put the euro into pressure leading to possible losses to the investors.
Pension funds will also suffer, as they are included in the proposed 39% loss. Pension is the money set aside to be given to those people who are working when they retire. This plan was to assist in raising funds to be used in raising the country's economy. However, the countries’ tax inspectors do not agree with the project and are frightening to go on a rampage if wages and pensions are reduced.
Italy’s Prime Minister Silvio Berlusconi' is under pressure to deliver a budget that will help in resolving the economic problem in Greece. A budget is a business plan of the expected expenses and incomes savings, and borrowing for the next fiscal year. Greece has to determine the bank's capital requirement and its debt before they can make an appropriate budget and plan on how to get more funds to sustain it.
The EFSF has been given the powers to buy bonds in an attempt to recapitalize the economy. A bond is a liability security, which is issued to a person who owes the money. He is expected to give a certain sum of interest in accordance to the terms stated in the bond. It is a legal contract specifying the mode of repayment of borrowed money at a certain interest over a specified period. The EFSF hopes to recapitalize the banks by buying the bonds and using the money to go into more investments.
Slovakia are not in agreement with the rest of the EU members, on the idea of using the EFSF funds to buy bonds, and recapitalize banks in an effort to reduce the debt burden of the Greeks. The EFSF funds are the private investments that are actively managed and utilized in domestic and foreign markets. The EFSF funds are to be replaced by a permanent rescue fund to help in reviving the economies of the member states that face difficult economic times like the Greeks. The Greeks received funds meant to rescue them from avoiding evasion of payment of debt from the international monetary fund. The Slovakians are trying to seek support from the other EU members to give more funds to the EFSF, to make it stronger and independent so that in case the same situation arises in the future it can be able to deal with it.
The European Banking Authority conducted a study to assess the capital ratio of the banks and was expected to identify it as a market value. The capital ratio is the of the bank’s financial strength. A bank with a high capital ratio is said to be financially stable and can operate well. The banking systems are expected to use the balance sheets in an attempt to get people to have confidence in their ability and capabilities. This will assist in reducing the foreign debts.
A new study shows that Greece budget deficit was widening, and something needs to be done urgently to fix the situation. Deficit is the quantity or value that falls short of the required amount. This means that the budget drawn by the Greek’s financial planners did not have enough sources of income to meet the necessary expenses. The expenditures exceed the income.
The article gives the solutions that the EU members are trying to put forth. However, some of the ideas they suggest might not produce the desired outcome. They want the banks to bear up to 50% of the country's loss. This means that the banks will shift the responsibility to the common citizens by raising the interests on loans. This will reduce the amount of loans that people will borrow, as high interest rates means that whatever size acquired will be higher when one is paying it off than those with lower lending rates. This will not help in solving the situation as people rely on loans to obtain the necessary resources for investing, (Fremont, 19).
The proposal that the EFSF should be used to buy bonds and maximize the funds they get in capitalizing banks is the best solution. This is because banks are the key to economic growth. By focusing their attention to increasing the number of capital ratio of the banks, the EU will resolve the issue although at a lower rate as the people and investors’ have lost faith in the local banking system. The EFSF should also give the banks more money to use as capital in order to create more money and attract international investors.
Cutting down on the pension and wages of the workers in an effort to raise capital for the country is not a satisfactory solution. It has sparked different reactions from the customs investigators who are threatening to go on strikes if it takes the suggestion into account. This simply means that some useful days will be wasted instead of using them to make more money as people go into the streets to oppose such a move.
Banning banks from paying their shareholders their dividends will only serve to make the situation worse as the investors will sell their shares in the banks and this means that the capital that the bank had will reduce the meaning that its functioning might be hindered due to lack of sources of capital.
The Economic situation in Greece is extremely dangerous, and if the EU members do not come up with a satisfactory solution soon affects the world’s economy. Their main concern is that the 17 currency states may go back into recession. That is why they are working round the clock to find solutions on how to handle Greece’s debts. Among the possible solutions is to let the banks, financial institutions, and pension funds to take up to 50% of the debt through losses. The EFSF can also be useful in giving the bank's capital to increase their capital ratio. However, political instabilities in some countries like Italy may inhibit the pace of finding a workable solution for this problem that is threatening to disrupt the world’s economy.