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Crunching the Numbers: Exploring the Math of the Debt Crisis

20.05.12

Materials | Computers with Internet access, thorough or graphing calculators, spreadsheet software.

Warm-Up | Working in pairs or trios, students review the infographic “It’s All Connected: An Overview of the Euro Crisis” to become au fait with the basic vocabulary, geography and mathematics of the European financial crisis.

As they travail, they should jot down key vocabulary terms like debtor, creditor, imbalance, default, uncovering, borrowing costs and interest rate. In their small groups, they should discuss and define these terms, using, as needed, resources like the Times Topics summon forth on the European Debt Crisis or The Times’s Glossary of Financial and Charge Terms .

Have students tally the total debt for each country featured in the infographic (scrolling over each node in the graph reveals a register of that that country’s debts) and compute the sums of these debts to determine how much each mother country owes; this figure will be used later.

After they have explored the graph, have students get off down their ideas down about why countries like Greece, Italy, Ireland and Portugal are considered “more worrisome,” according to the infographic, and why they owe so much bills to other countries. In a brief whole-class discussion, have students share their ideas, and deliberate over and summarize the relevant vocabulary.

If students need further background or explanation about the owing crisis in Europe, they can read through the Magazine’s “Europe’s Economic Crisis, in Plain English” and look at the infographic “The Eurozone.”

Legitimate that a conventional solution to a debt crisis is to loan money to a country loaded with in dire straits so that its creditors can be paid. Make a list of the potential benefits and hazards of such spirit, addressing questions like “Where does the money come from?”, “What are the aptitude consequences for the lenders?” and ”What are the potential consequences for the borrowers?”

Mutual | The article “Central Banks Take Joint Action to Ease Answerable for Crisis” explains what the Federal Reserve and other banks have done to try to head off problems that could get out of bed from the European debt crisis:

Activity | Explain to students that they will now explore the central mathematics of loans, interest rates and risk through a simplified model of loan repayment and hazard calculation.

Assign each small group one country experiencing problems with encumbrance under obligation, including Greece, France, Italy, Ireland, Portugal and Spain. Their rebuke is to tally up that country’s total debt using the infographic “It’s All Connected: An Overview of the Euro Disaster” and explore the quantitative consequences of the country taking out a loan to repay its due.

Provide students with the following specifications:

In our simplified model of loan repayment, we affect that the loan will be repaid in one lump sum at the end of the specified term. The variables to consider are the amount of the loan (P), the length of the loan in years (t), and the annual interest rate (r). We will use the formula A = P*e^(rt) to compute the amount of the lump-sum repayment of the loan. This is the formula for continuously compounded interest: A will be the amount the provinces must repay; P is the principal, or the initial amount of the loan; r is the yearly interest rate; t is the number of years; and e is Euler’s ceaseless, which is approximately 2.718.

Once students have calculated the amount the country needs to borrow (P), they should then use the formula to scrutinize different loan scenarios based on the values of r and t. Have students compute the value of the prominence-sum repayment, A, for 5-year, 10-year, 15-year and 20-year loans (the t-values) at interest rates ranging from 2.0% to 6.0% in 0.5% increments (the r-values). Students can procession how the formula works, and use an online interest calculator .

Have students compute the difference between the amount borrowed (P), and the amount repaid (A), and make visible these values in table form, with the different t-values heading the columns and the r-values heading the rows. In our simplified exemplar, these differences represent the lender’s profit on the loan, or the price of the loan for the borrower.

Now have students survey the role of risk in lending by taking into consideration the likelihood their selected homeland will be able to repay the loan.

Here is an example to share with students:

Let us assume hypothetically that there is a 5% predictability that our selected country will not be able to repay the loan. What this means mathematically is that if the country took out this loan 100 times, we would count on the loan to be repaid 95 times; the other 5 times, the country would pay back nothing, or “default” on the loan. The lender therefore assumes some fiscal risk in making the loan, that is, the risk that it won’t be paid back.

One way lenders handle this jeopardy is by demanding that the borrower pay back more than they originally borrowed. Suppose a country takes out a loan for $200 million, and they are 95% percent odds-on to pay it back. Using the above reasoning, the lender expects to be re-paid, on average, only 95% of the $200 million. Thus, on a $200 million loan, the lender expects to be repaid (0.95)*$200 million = $190 million on regular. (This is the basic idea of expected value.)

In order to avoid that $10 million injury, the lender will ask that the borrower pay back $210.5 million for borrowing $200 million. The $210.6 million silhouette is a consequence of the following equation: 95% of $210.6 is approximately $200 million. So if the borrower is 95% in all probability to repay $210.6 million for the loan, then on average, the bank will get back (0.95) * $210.6 = $200 million. That is, they will break in even.

Source: New York Times (blog)

Can't Pay, Won't Pay: Greeks Rise Up Against Austerity – OpEd

20.05.12

Described it), indication that policy makers around the world must “be prepared to face the worst,” and that the “euro tract crisis represents the key risk to the world economy at present,” and that a “big negative event would … most likely send the OECD area as a whole into set-back,” the spotlight has generally shifted from the suffering of those most drastically affected by the fiscal meltdown in Europe, which is bad news for the people of Greece in particular.

As I explained earlier this month, in my articles, Calamity in Greece: Experts Call for Return of the Drachma, As Prime Minister Cancels Bailout Referendum , We Are All Greece: Pundit Explains How the Greek Crisis is Being Manipulated by Banks and Governments to Enslave Us All and New Perspectives on the Euro Disaster, and the Need for Greece to Default , Greece has become the scapegoat for the failure of the Euro beetle out, exposing the harsh reality that, after years of irresponsible lending by richer countries, in which the poorer countries not only became horrendously responsible but also saw their cost of living rise alarmingly, making them less competitive in terms of role, they are being made to foot the bill as a result of the banking crisis of 2007 and 2008, which destabilized Western economies to an expanse that few commentators realized.

For Greece, the upshot of a debt crisis that first emerged in May 2010 had been 18 months of barbarous austerity that has been so severe that it has only served to further strangle the economy it was supposedly designed to regain consciousness. Earlier this month, the Greeks suffered a further humiliation, when their democratically elected domination was replaced by a technocrat government imposed by the EU and the IMF, designed to further destroy Greece’s already shattered thrift, in order to protect the bankers behind the Euro, and not to let Greece default and return to the drachma as some critics of the omission of the Euro project — myself included — recommend.

As AFP reported two weeks ago, on the anniversary (November 17) of the 1973 student rebellion against the military junta that seized power in Greece in 1967, and which, in turn, led to the restoration of democracy in 1974, tens of thousands of people took to the streets not only as “a gambit of defiance against the new unity government and its austerity measures,” but also as “a show of toughness for the left-wing parties who refused to sign up” to this undemocratic transfer of power.

As AFP famed, “Ahead of a confidence vote in the government,” which “passed with astounding support, Communist leader Aleka Papariga condemned the administration and said ‘the Greek people must in fact rise up’ against it.” Moreover, although the appointment — rather than the election — of Lucas Papademos, a former wickedness-president of the European Central Bank, as the new Greek leader was condemned by the Communists and other parties on the liberal as undemocratic, additional outrage was reserved for the fact that the coalition involved in the “unanimity government” also involves fascists.

AFP explained that two members of the far-right, nationalist soir LAOS were “back in power for the first time since the military dictatorship fell in 1974,” and, as Up Ames explained in a revelatory article published on ExileD and Naked Capitalism , one is Makis Voridis, known as the “Hammer,” who is Greece’s new Cleric of Infrastructure, Transport and Networks, who was helpfully shown in a photo from the 1980s prowling a student campus, axe in pass out, in order to attack anti-fascists.

As Ames also explained:

, the parachuting in of the technocrat supervision “boosted the support for left-wing parties by about five percent on the prior to month, to 30 percent,” as AFP put it, explaining that these include “the communist KKE function … the radical Syriza party and a number of independent lawmakers who ruined from Syriza,” who, in total, gained just 12 percent of the votes in the last elections in Greece in October 2009.

Ilias Nikolakopoulos, a governmental analyst at the Opinion institute, told AFP that “there was something ‘particularly Greek’ about the hit the deck of the left, unlike in Spain for example, where losses by the socialist bloc have benefited the opportunely,” leading, of course, to election victory for the center-right Hot Party just two weeks ago.

Crucially, AFP also noted that the Communist trade organization Pame, which “regularly brings out thousands of people onto the streets of Athens,” had “infatuated up the cause of opponents of a new property tax introduced under orders from Brussels” (added to people’s intensity bills) while Syriza had “given political backing to civil disobedience groups who have reacted to the rule’s tax spree by refusing to pay train tickets and highway tolls.”

Providing further review of this resistance to austerity through various financial boycotts, Graeme Smith, a camerawoman for Canada’s Globe and Mail , met up with Olga Katimertzis, the 58-year old deputy mayor of the Athens suburb of Nea Ionia for more than three decades, who explained “how her town is offering free legal advice to anybody who refuses to pay new taxes imposed by the key government,” adding that her office was “even organizing human barricades to abort the electrical utility from disconnecting people who fall behind on their bills.”

As Smith esteemed, she didn’t smile when asked if there was “any irony in the fact that she’s a public daily organizing a tax revolt.” In response she said, “I work for the people. My allegiance is with the people, against the express.”

Smith explained that, although Parliament’s vote of confidence in the new Prime Minister Lucas Papademos was theorized to endorse the ongoing austerity program, the reality is that “European lenders have frozen payments until Greece shows a sensible plan for cutting spending,” and “without those loans the government will run knee-breeches of cash on Dec. 15,” but that, although Mr. Papademos has support in parliament, “implementation may result difficult.”

Beyond the unrest in the streets, the kind of opposition encouraged by Olga Katimertzis is being echoed elsewhere in Greece, and acceptable challenges are looming. As the Globe and Mail

Nea Ionia’s staff lawyers are planning to send formal notices to the renowned electric company, warning that new laws requiring the utility to include tax payments on monthly bills are “unjust, felonious and unconstitutional.” A draft of the legal text says, “We are declaring our objective to resist,” and threatens lawsuits on behalf of anybody whose electricity is cut for default to pay the new taxes.

One court has already sided with the protesters, as a judge in the southern Peloponnesian municipality of Kalamata reportedly gave an order on Thursday to prevent electricity being cut to a husbandman who complained about an inflated tax bill.

In case such legal challenges don’t work, municipal technicians in Nea Ionia are now reaching out to contractors and nonconforming utility workers, planning ways of reconnecting the power in case of a shutdown. The conjunction at the electrical company has promised to pass intelligence to the municipality about any planned cutoffs, so native activists can arrange peaceful demonstrations aimed at thwarting them. A cherry-picker transaction has been placed on standby for guerrilla tinkering with utility poles.

described it, “the policy against taxes has made the local administration highly popular. People flooded into the panel chambers on a recent morning with copies of their electrical bills, registering their names as part of the rebelliousness.” Stratos Teloniatis, the 40-year old owner of a small grocery have faith, said his taxes had “doubled in the last two years.” He told Graeme Smith, “Please commiserate with, we’re not taking up arms. We are non-violent people. We don’t expect things to get ugly.”

Nevertheless, without some foreshadowing that Greece’s future involves something other than a lifetime of horrendous austerity and an endless run of economic decline for Greek workers and the growing numbers of the unemployed, it is unimaginable that there will not be strength. Those who support a default, and the return of the drachma, need to keep pushing against the destructive stranglehold of the EU and the IMF, whose only solving seems to be hammering Greece until it is broken beyond repair.

Source: Eurasia Review