Understanding the Euro Crisis: A Family Business Fable
Fears that Italy, the world's third largest debtor nation, cannot afford its obligations shook world markets, sending investors into the relative safety of the U.S. dollar and Treasurys…Stocks fell sharply in the U.S. and Europe…” It's not just Italy. The contagion is spreading. They've got to stop this," said Marc Chandler, Brown Brothers Harriman chief currency strategist. —CNBC.com
In order to visualize what’s happening in Italy, and what it means to you, let’s play a little game of pretend. Let’s pretend Italy is your business.
No, you could never be that stupid. So let’s pretend Italy is your high-living cousin Silvio’s business.
Now, much to your amazement, Silvio’s business actually does all right. Not as good as those run by other members of the Euro side of your family—like cousin Helmut or cousin Pierre--but still way, way, way better than adopted cousin Constantine’s. Silvio actually makes really good stuff. His problem is management.
Silvio likes the good life and he’s always paying himself more than his business really justifies. Also, he has everyone on his side of the family on the payroll and he pays them too much as well. He has been able to get away with that because a lot of other people have been willing to loan him money cheap. Until now, that’s worked out fine. Silvio has always paid back the money on time.
Even so, everyone has their doubts about how long Silvio can keep it up – both what he brings in and what he pays back. There’s no real reason to think he can’t, it’s just that Silvio has a bad rep and you know how families gossip.
All of this would never have been a problem if it hadn’t been for that bum Constantine and his second cousins Seamus and Fatima. See Seamus and Fatima both got caught up in the mortgage mess. They fell for the old “home prices can only go up” line and borrowed way more than they ever should of.
Well, it would make the whole Euro clan look bad if Seamus and Fatima went bust. That’s why a bunch of them pitched in and loaned them money. Constantine didn’t make the mortgage mistake. He just lied to everyone about how much money he had in order to wheedle his way into the Euro family. Once he’d done that, it was easy for Constantine to get people to lend him money.
Constantine going broke was harder on everyone because everyone in the family had been saying he was OK, even though he was lying through his baklava. So the family stretched its finances really thin and floated him some money (although, really, there’s no chance he’ll ever pay it back).
But this started to have a big impact on Silvio. When Seamus, Fatima and Constantine got into trouble the people who loaned him money – Mr. and Mrs. Investor -- started worrying about anyone named Euro. As a result Silvio had to pay more to borrow money.
The other Euro’s knew this was a problem. It didn’t help that all the Euros together only have a fraction of the money it would take to keep Silvio in business.
This all has an impact on you because your cousins on the other side of the family, George and Martha Banker, have placed a little bet with Mr. and Mrs. Investor. In return for a little bit of insurance money, they promised the Investors that they would make them whole if Silvio went broke. Why? Because the Bankers figured there was no way Silvio would ever, ever go broke. (They forgot that they thought the same thing about that nice Mr. Lehman.)
Turns out, you’ve entrusted quite a bit of your own money to George and Martha, and so have all your customers. If Silvio can’t afford to pay his bills, and George and Martha have to pay off Mr. and Mrs. Investor, then you (and all your customers) have to worry whether the Bankers will have any money left to pay you. And I don’t have to tell you that no one has any extra money to lend the Bankers these days. So you see how Silvio’s problems ripple through the whole extended family very, very quickly.
All because those suspicious Investors started worrying about Silvio. Makes you wonder why they didn’t look a little harder before giving him money in the first place.
P.S. The Euros all really hope the Investors don’t look too hard at how Pierre and Juanita are doing.
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