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Investors leaving one after another, countries follow

http://articles.economictimes.indiatimes.com/2011-11-07/news/30369665_1_euro-zone-stock-markets-wary-investors

Due to bad lending habits among other factors, Greece and the rest of the Euro-region states went into economic turmoil. Near the end of 2009, Greek government faced the highest deficit and debt among all the states in the EU, leading to high borrowing costs, causing economic crises. At that time, there was a global financial crises going on, and Greece made headlines as the first state in the EU that collapsed in a time period where the US economy was having trouble getting back to its feet. Even though Greece had workers who worked the most hours among European nations, ever since the crises, the country has not recovered at all.  This crisis mainly followed what happened within the US. To put it in simple terms, majority of the experts could agree that the late 2000’s crisis was caused by the collapse of the US housing bubble, financial institution, and tightening of international credit lending. Economy worldwide slowed because of this, and Greece, who initially might have been somewhat well off considering the “endless” amount of credit available in order to satiate its own lending practices. Once the bubble within the US collapsed, tighter lending policies ultimately led to choking of Greek asset support. Waves of European bank failures, decline in stock indexes, and large reduction in European value of equities all snowballed and crushed the Greek economy.

Greece has been trying to work out a solution with the rest of EU to solve the debt crises, but investors are losing hope and many of them are abandoning assets in Greece and the rest of the region in general. Even after the financial crises in the US, many investors that currently hold asset in Greece is considering taking “refuge in US Treasuries and the dollar.” The crises that stemmed from the US carried over to Greece and investors are considering Italy the new Greece with its euro-zone high 6.4 percent yield bond. Ultimately, this would lead to an eventually bailout of the US debt and the deficit/aftermath via the US region. Essentially, the situation in Greece (if worse comes to worst) could become a ripple effect that would sweep across countries globally.

In class, we talked about how entities in the world are connected by nodes and how people in a network influence one another’s behavior and decisions. In terms of the Greek economy, investors are not individual entities, but rather they make decisions that would reflect the rest of the market. Investors are pulling out of the market one after another because they are influenced by other investor’s action and recommendations to reinvest in the US. Following the first initial wave of investors, a cascade of investors follows. They no longer need to make a detailed assessment of the financial situation and invest in their own information about Greece. Instead, they are just following the first wave of investors and reinvesting their assets elsewhere, which receives the direct benefit of not being in the region when the economy collapses. The first wave of investors instilled fear among the rest of the investors to the point where they received biased judgments and simply choose to reinvest to the US without even considering other countries in the EU region. Other EU region like Italy and Spain are buffering up their financial base in order to anticipate the same fate that Greece suffered. The countries in the EU region are cascading after one another mainly following (on a smaller scale) investors who cascaded after the Greece incident.

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