When you borrow or invest money, research should always be done in order to insure safe movements of your hard-earned paycheck. Looking at the debt crisis Italy is currently in caused by issuing bad loans, one can see reasons for smart investment. When loans are given our banks don’t always have money to supply the investor therefore causing them to use other investor’s money. Even though this sounds detrimental, it can be done. The kicker is what happens if many investors cannot properly pay you? This can be caused by anything from a bad housing market to a full on economic downturn. When you have elements such as unemployment and economic downturn combined with bad loans, you have a serious crisis on your hands. As you will see, this is not the first financial crisis Europe has experienced, one of them previously taking place in a neighboring country to Italy, in Germany. Financial crisis’ are not the end of the world and can be handled in many different ways. Italy is in its current condition due to several forces, but they can better themselves by making adjustments and sticking with them.
Italy and the Sovereign Debt Crisis
Italy is not the only country struggling when it comes to bad loans and struggling banks. Other European countries such as Greece, Spain, Portugal and Germany are also not in good standings. France would be the next country to be struck by a crisis due to its bonds held in the countries listed above. Due to increased unemployment and a prolonged recession it is making it hard for borrowers to repay their loan. On top of unemployment and recession European banks are unable to absorb a significant amount of loses at this time. Italian banks along with all European banks need to increase their capital in order to build a strong foundation. When a bank has its money vastly tied up in many different directions, a finical crisis can bring it to its knees. The sovereign European debt crisis has spread like wild fire throughout many European courtiers. Countries often sell bonds in order to fund many of its government operations. When countries have to pay back these bonds is where they can get into trouble. When the economy is struggling with little to no growth some bondholders can demand a higher interest rate in case the countries government defaults. When a country loses the trust of bondholders, the purchasing of bonds obviously decreases due to the insecurity. There are many options that might help countries dig their way out of this crisis, which are renegotiating the debt, printing more money and lastly defaulting. Even though each one of these options seems feasible at the moment, long run affects will have to be dealt with. Even though a plausible option is to devalue your local currency, European countries do not have this option because they have the same currency. Devaluing your currency would give your country no aid in digging out of this debt crisis.
Behind the United States and Japan, Italy has the third largest bond market in the world. You can see how the affects of defaulting might influence investors and current bondholders. Being able to sell these bonds to different international banks is where problems can occur and therefore escalating the financial crisis into many countries. French, German and United State Banks putting them at high risk when an economic downturn occurs owe many Italian bonds. When these countries see this economic downturn and higher risks, investments will decrease.
Compared to Spain
In the late 90’s and early 2000’s Spain encountered a construction boom in the housing market. Unemployment dropped as immigration increased in Spain fueling this sector of the economy. With the combination of cheap credit and high population investors were able to borrow high amounts of money to finance their purchases. Spain was going through what the United Sates is…