One of the primary uncertainties in global markets today is the potential collapse of The situation in Greece allows for an important point about financial innovation and regulation. Financial innovation is critical for developing new and creative ways to raise capital. Financial services regulation plays an important role in protecting investors and maintaining the integrity of financial markets. Government’s must walk a difficult line in encouraging financial innovation while debating and enacting common sense regulation that protects against systemic failure. Is the proposed financial services regulation bill an example of typical reactionary legislation (see Sarbanes-Oxley, TARP, Patriot Act, Private Securities Litigation Reform Act) or an example of thoughtful common sense regulation that will ultimately protect investors? I have serious reservations.
Tiffany Smith
ReplyDeleteThe Greek government is only the latest to come close to default on their public debt. It seems that this is a growing trend and I am somewhat unsurprised. From my understanding, Greece has insufficient funds in their treasury to make even the minimum payments on their debts. According to another article I was reading, their debt level is about 120 percent of their gross domestic product and their public sector absorbs what amounts to 40 percent of GDP. Apparently, Greece has the highest in Euro-zone debt-to-GDP ratio of 13%. Germany and France have around 6%. With the Eurosystem in place, smaller countries in the union are not supposed to print and/or make their own money. However, as you can guess, while Greece can’t directly print its own money, it did coerce a local bank to buy its bonds; the bank can then deposit the bonds with the ECB in return for a ‘pre-approved’ loan. Apparently with this series of arrangements, a special purpose subsidiary of NBG, facilitated access to €5.1 billion for Greece. This equates to about $6.84 billion in US dollars, that the Grecian government can't now afford to make the minimum down payments on. It makes me wonder whom will assume the responsibility for this debt…I presume the citizens… Just as it is impossible in the U.S. to create a watchdog that will prevent the next crisis, it is impossible to successfully implement a regulatory mechanism that forces governments to play by the rules. The only mechanism that may work would be a market based one. Any thoughts?
It is true to a certain degree that a market based mechanism will make the government play by the rules. But at the same time they make the rules...so...(Just saying; I'm a skeptic). It is possible that a market based economy will aid a country such as Greece out of debt. Russia attempted to create a new economy. The New Russia became less bureaucratic, more market-based and more internationally competitive in general. Here the government made noted efforts to mitigate the impact and lift the economy out of recession. Since then Russia has see some success in inflation of capital. Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations. At any rate, Greece needs to find some type of plan because what they are doing is clearly not working. The Associated Press noted that "Athens hopes the rescue plan — in which the 16 eurozone countries promised loans together with funding from the International Monetary Fund to assist Greece if it is unable to borrow or pay its debts — will help restore market confidence and bring down the spreads. The European Central Bank also extended relaxed rules that keep downgraded Greek bonds eligible." But the problem is that "If borrowing costs remain high, the savings from painful austerity measures that Greece announced a few weeks ago could be squandered on paying off high interest rates on debt."
ReplyDeleteI think most regulatory acts that we have in the United States are not necessarily transferable to the European model because the European Union is a collective body that weighs the financial stability and needs of most [all] its members before making sweeping laws. In the United States, some of these acts while subject to state laws, they generally come down to what federal interest is being pushed at the time. Since Greece is in the EU, but isn't a powerful member within the EU structure, it is hard to see regulations being passed to which they would be able to completely comply with to protect investors and stimulate national growth. Greece would have more of a problem doing so than the UK or Germany would for instance. This would make for a volatile marketplace in which investors may shy away from placing too much money into the Greek businesses and market exchanges. That would hurt Greece and the EU, but Greece would bear the brunt of the burden. These risks would make it hard for Greece and smaller European countries like it to make strict regulations on businesses such as TARP. The Greek national government would and is in a constant balancing act between their own nation's needs and the European Union's needs. The U.S government does not have these same issues when they make those laws. Their “shareholders” are the people who elect them.
ReplyDeletethat is very unfortunate for a country like greece
ReplyDeleteDetrivatives are the riskiest investments in the financial markets. For Greece to even fathom investing in such high risk securities calls for change in the way they invest their money. Most countries get their money through taxes which come from the people. Also, Greece needs to state as financially stable as possible because I believe they are circulating the euro already and the strength of that currency is in the financial strength of the individual nations that trade with it. It was just a dumb move by Greece and now they are in a very bad position. To answer the question posed at the end I take the position that the regulatory reform is merely a reactionary move. Investors will never be fully protected because Wall St. will always be a step ahead of the government. Every financial regulation in the history of this country has been from a reactive standpoint, meaning that the government is stopping unethical behavior that has already occurred from happening again. Yet, it does nothing to help protect the public from what Wall St. may do in the future.
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