euro

Let’s just suppose for a moment that the Greek debt crisis can somehow be resolved without a disorderly default or the collapse of the Euro. As I have written previously, I very much doubt that it can, and today’s news gives little cause for hope. Although the leaders of both of Greece’s major parties agreed this morning to the latest round of austerity measures, the EU powers have backed away from ratifying the deal, demanding a further 325 million Euros in budget cuts. The Greeks now know how the Turks must feel, constantly on the cusp of a final agreement with the EU, but never quite getting to the finish line. This latest wrinkle will no doubt be ironed out within days, if not hours. It requires a much greater leap of faith, however, to believe that this will resolve the crisis once and for all. But suppose it does. What then? [click to continue…]

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Draco, the seventh-century BC Athenian legislator from whom we get the word “draconian” replaced the system of blood feud and oral law with a harsh, but transparent, written legal code. One of the provisions of Draco’s code was that any debtor whose status was lower than that of his creditor was forced into slavery. It’s hard not to think of Draco when contemplating the current to and fro between the Greek government and the “troika” of the European Central Bank, the European Commission, and the International Monetary Fund, representing Greece’s creditors, trying to avert a sovereign default and keep Greece from leaving, or being ejected from, the European monetary union. These discussions are more properly considered a dictation of terms rather than negotiations. [click to continue…]

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Attentive and loyal readers of this blog will recall that I wrote, almost exactly a year ago, about China’s proposal to replace the dollar as the world’s reserve currency with the special drawing right (SDR), a unit of account used by the IMF, which is based on a weighted basket of currencies that includes the dollar, the euro, the yen, and the pound. I wrote then that this proposal had virtually no chance of being adopted, one reason being that the Europeans would be loath to abandon their new currency, which already accounted for a growing share of world reserves, in favor of a faceless accounting unit. [click to continue…]

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China has just proposed creation of a new international reserve currency or, rather, the revival of an existing measure of value, the Special Drawing Right (SDR), which has been used for the past 60 years as a unit of account by international financial institutions like the IMF and some of the multilateral development banks. Based on a weighted basket of currencies – the dollar, the pound, the euro and the yen – use of the SDR might mitigate the volatility in exchange and interest rates and would partially de-link reserves from dependence on the policy decisions of any single country (i.e., the U.S.), or so the Chinese argue.

With over half of its $2 trillion in foreign exchange reserves invested in U.S. Treasury bonds and other dollar-denominated bonds, the Chinese have reason to worry. A major decline in the value of the dollar relative to other currencies could have disastrous effects, and inflationary pressures from the stimulus package, the Federal Reserve’s “quantitative easing,” and other spending-driven increases in the money supply make this at least conceivable.

How likely is this to happen, and would it be a good thing if it did – and if so, for whom? [click to continue…]

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