Pictured: Thomas Essaye with Dr. Wiggenhorn
By Jarin R. Eisenberg
Thomas Essaye, an investment analyst with over 10 years experience as a professional trader, spoke to Dr. Wiggenhorn’s Global Financial Management class to discuss the Greek financial crisis on March 1st, 2012. Essaye stated that while Greece’s economy is small, about the size of Dallas-Ft. Worth’s economy in Texas, what happens with Greece has larger social and economic consequences across Europe. What makes the current debt crisis different than previous loan defaults is that Greece no longer has their own currency, but is now on the Euro. (Therefore they can no longer devalue their own money to help pay off their debts.) People are afraid of contagion, or the idea that if Greece defaults on their loans then some of the other PIIGS (Portugal, Italy, Ireland, Greece, and Spain) could possibly default on their government bonds. Contagion and the fear of contagion happened in the United States during the financial crisis in 2008.
While the economies of Greece, Ireland, and Portugal are relativelysmall, if the crisis hit Spain or Italy, then the euro itself might not stand as we know it today. The reality of the situation is that no one really knows what would happen, but the idea of a domino effect that would impact economies across Europe and even here in the United States, makes for a very complex situation. As Essaye stated, we are no longer isolated. In a globalized economy what happens in one country has impacts across the globe. In addition, people are concerned with the amount of money it would take to solve the financial crisis in Greece knowing that it could happen again and a third bailout might be needed.
Essaye was able to relate and breakdown these complex ideas into simplified scenarios. For example, Essaye asked the class to imagine their professor was in a financial crisis and came to the class to ask for money with the promise that she would correct her spending habits. The class, with the mindset that they are all in this together, lends the professor money. The professor doesn’t change her habits and asks for more money. This, Essaye stated, is not far off from the Greek banking crisis where countries such as Germany are concerned by the realistic possibility of having to use their own taxpayers’ money to continually bailout Greece.
The lessons learned from the 2008 financial crisis and the euro crisis are similar. Surviving a crisis doesn’t mean the problems are solved. Essaye emphasized that we must critically examine the structural issues that led to the banking crisis in order to prevent another from happening. Unless structural issues are corrected and better policies and practices are put into place, we are just putting out one fire to likely see another one start up.
Essaye also gave the class some practical tips for evaluating what is going on in the financial world. He said to use Italian and Spanish bond yields as a barometer of what direction European economies are heading because those countries are far too large for a bailout to occur. His threshold was 7%. Such occurrences could create a drastic domino effect in Europe that would lead to world-wide effects.
To learn more about Thomas Essaye please visit: http://www.sevensreport.com/