EECS 1710 Lecture Notes - Lecture 28: Exchange Rate, Government Budget Balance, International Monetary Fund
24 Jun 2018
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EECS 1710 Lecture 28 Notes
Introduction
Impact of the Greek Crisis
The flows dictate the unique supply and demand conditions for the currencies of the
two countries, which affect the equilibrium cross exchange rate between their
currencies.
Movement in the exchange rate between two non-dollar currencies can be inferred
from the movement of each currency against the dollar.
Financial institutions may seek to benefit from the expected appreciation of a currency
by purchasing that currency.
Analogously, they can benefit from a currency’s expected depreciation by borrowing
that currency and exchanging it for their home currency.
In spring of 2010, Greece experienced weak economic conditions and a large increase in
the government budget deficit.
Investors were concerned that the government of Greece would not be able to repay its
debt.
As of March 2010, bonds issued by the government of Greece offered a 6.5 percent
yield, which reflected a 4 percent annualized premium above bonds issued by other
European governments (such as Germany) that also used the euro as their currency.
This implies that the borrowing of the equivalent of $10 billion dollars from a bond
offering would require that Greece pay an additional $400 million in interest payments
every year because of its higher degree of default risk.
These high interest payments caused even more concern that Greece would not be able
to repay its debt.
In May 2010, many European countries and the International Monetary Fund agreed to
provide Greece with new loans.
The agreement enabled Greece to immediately access 20 billion euros so that it could
cover its payments on existing debt.
Document Summary
The flows dictate the unique supply and demand conditions for the currencies of the two countries, which affect the equilibrium cross exchange rate between their currencies. In may 2010, many european countries and the international monetary fund agreed to provide greece with new loans. The agreement enabled greece to immediately access 20 billion euros so that it could cover its payments on existing debt. The agreement could result in financing of more than billion over time. The unique supply and demand conditions for the currencies of the two countries, which affect the equilibrium cross exchange rate between their currencies. Movement in the exchange rate between two non-dollar currencies can be inferred from the movement of each currency against the dollar. Financial institutions may seek to benefit from the expected appreciation of a currency by purchasing that currency. Analogously, they can benefit from a currency"s expected depreciation by borrowing that currency and exchanging it for their home currency.
