I finally heard something very simple this morning that made the debt crisis make more sense to me. It allows me to make analogies to personal finance, and then see why those analogies fall apart. So I thought I'd spell all that out, but first the easy explanation:
Many of the smaller European economies are paying more in interest on their debt than their economy is growing. So for a hypothetical Euro country in trouble, interest on debt is 3% and growth is 2.5%.
This isn't such a bad thing if your debt is, say, 20% of your annual income. It sucks, but you pay it down more quickly than you might otherwise. But Greece's debt in 2009 was 167.2% of GDP. This is like having $167,000 of debt and having an income of $100,000/year. Which isn't that odd... if you've got a mortgage and it's smaller than your annual income, that's amazing. Germany, which is recognized as the financial rock on which the Euro rests, has a debt equal to 176.8% of their GDP.
Ireland tops the world at their debt being 1305% of their GDP. Yes, that's having $1.3 million in debt while making $100,000/year.
(If you're curious for the general rundown, these stats were obtained from a slideshow on CNBC
But again, the real problem is the disparity between the interest rate on the debt and economic growth. So long as growth exceeds debt interest, you're going to gain ground--in the case of Ireland you'd be doing that for several generations, but eventually you'd pay it off. But if your growth is lower than your debt interest and you can't pay off the principle in a timely way... well, I believe the technical term for that is "circling the drain." This is why a bailout is only a short-term fix--if you don't get their economies growing at a rate higher than their debt interest, or pay off the debt principle in a meaningful way, it's just a short-term fix.
So that explanation made a ton of sense to me. As to how to fix it, that's where I have to turn to personal finance solutions, and then look into why those don't work for countries. And then... um... anyone want to float a solution out? That's a lot of Europeans who would owe you one. I'm pretty sure you'd get a wine and cheese basket out of it. Just think about it.( Collapse )