countries prepared?” asked Sciacca.
“First, they have all adopted their pre-Eurozone currencies,” replied Gottlieb. “Second, as a condition of their banks reopening, the governments have uniformly instituted capital controls. The anticipated reaction of depositors is to make a run on the banks. Closing them for several days was a good decision. This will allow the heads of state to issue appeals for calm.”
“Julia, from a political perspective, how do you anticipate the various governments responding?” asked Sciacca.
Julia wasn’t prepared to jump into the Eurozone collapse situation, but she and Sarge had discussed this subject over dinner the night before.
“Governments and their politicians have a common goal—remain in power,” said Julia. “I’d expect them to strike a nationalistic tone and separate their particular country from the others in the Eurozone. I foresee large political demonstrations orchestrated by the predominantly left-leaning governments of these four southern European nations. They will portray the wealthier nations of France and Germany as the bad guys. If they are successful, the people will rally around the decision and the new currencies.”
“Julia is spot on,” added Gottlieb. “I have seen the proposed currency notes issued by the central banks of the four nations. They are very patriotic, featuring symbols and leaders of their historic past.”
“What will be the effect on the United States economy?” asked Sciacca.
“Obligations to official creditors like the IMF, the European Central Bank and the other European governments account for the vast majority of the three trillion dollars of indebtedness,” replied Gottlieb. “These global financiers will bear the brunt of the foreign losses resulting from the default. The foreign bank exposure, including those of the United States, totals around eighty billion dollars, which is widely dispersed around the world. The direct effects on these banks should be manageable. However, this action will plunge the former Eurozone into recession. Europe is America’s largest trading partner and its demise will probably have an immediate impact on our floundering economy.”
Instinctively, Julia looked at her watch as the opening of the stock market approached. “Markets don’t like volatility,” said Julia. “How bad can it get?”
“The markets in France are our best indicator,” replied Gottlieb. “Like most cash and derivative markets, mitigation strategies are in place to prevent mass hysteria from collapsing an entire stock market. History has shown that crashes are driven by panic as much as by underlying economic factors. They are truly social phenomena where certain external economic events combine with crowd behavior, creating panic selling.”
It was human nature to follow crowd behavior. Julia had observed this at sporting events. During a football game, a fan might suddenly turn around and look at the sky. Suddenly, fifty thousand individuals began to act as a single unit, almost a single brain, focused intently on what was happening off the field. Sociologists claimed crowd behavior was partly responsible for the market crash of 1929.
“What happened in France?” asked Sciacca.
“The French equivalent of our Dow Jones Industrial Average of thirty benchmark stocks is known as the CAC40,” replied Gottlieb. “Their mitigation strategy is fairly complex, but transactions are suspended for one hour when certain levels are met and the markets close completely when twenty-five percent of the value of the CAC40 has been reached.”
“What happened after the markets in France opened?” asked Sciacca.
“After a series of suspensions of trading and corresponding resumptions, the markets closed. The CAC40 bottomed out at twenty-five percent of value within three hours,” replied Gottlieb.
The room became deathly silent as the magnitude of the crash in French equities soaked in. More than one person in
“First, they have all adopted their pre-Eurozone currencies,” replied Gottlieb. “Second, as a condition of their banks reopening, the governments have uniformly instituted capital controls. The anticipated reaction of depositors is to make a run on the banks. Closing them for several days was a good decision. This will allow the heads of state to issue appeals for calm.”
“Julia, from a political perspective, how do you anticipate the various governments responding?” asked Sciacca.
Julia wasn’t prepared to jump into the Eurozone collapse situation, but she and Sarge had discussed this subject over dinner the night before.
“Governments and their politicians have a common goal—remain in power,” said Julia. “I’d expect them to strike a nationalistic tone and separate their particular country from the others in the Eurozone. I foresee large political demonstrations orchestrated by the predominantly left-leaning governments of these four southern European nations. They will portray the wealthier nations of France and Germany as the bad guys. If they are successful, the people will rally around the decision and the new currencies.”
“Julia is spot on,” added Gottlieb. “I have seen the proposed currency notes issued by the central banks of the four nations. They are very patriotic, featuring symbols and leaders of their historic past.”
“What will be the effect on the United States economy?” asked Sciacca.
“Obligations to official creditors like the IMF, the European Central Bank and the other European governments account for the vast majority of the three trillion dollars of indebtedness,” replied Gottlieb. “These global financiers will bear the brunt of the foreign losses resulting from the default. The foreign bank exposure, including those of the United States, totals around eighty billion dollars, which is widely dispersed around the world. The direct effects on these banks should be manageable. However, this action will plunge the former Eurozone into recession. Europe is America’s largest trading partner and its demise will probably have an immediate impact on our floundering economy.”
Instinctively, Julia looked at her watch as the opening of the stock market approached. “Markets don’t like volatility,” said Julia. “How bad can it get?”
“The markets in France are our best indicator,” replied Gottlieb. “Like most cash and derivative markets, mitigation strategies are in place to prevent mass hysteria from collapsing an entire stock market. History has shown that crashes are driven by panic as much as by underlying economic factors. They are truly social phenomena where certain external economic events combine with crowd behavior, creating panic selling.”
It was human nature to follow crowd behavior. Julia had observed this at sporting events. During a football game, a fan might suddenly turn around and look at the sky. Suddenly, fifty thousand individuals began to act as a single unit, almost a single brain, focused intently on what was happening off the field. Sociologists claimed crowd behavior was partly responsible for the market crash of 1929.
“What happened in France?” asked Sciacca.
“The French equivalent of our Dow Jones Industrial Average of thirty benchmark stocks is known as the CAC40,” replied Gottlieb. “Their mitigation strategy is fairly complex, but transactions are suspended for one hour when certain levels are met and the markets close completely when twenty-five percent of the value of the CAC40 has been reached.”
“What happened after the markets in France opened?” asked Sciacca.
“After a series of suspensions of trading and corresponding resumptions, the markets closed. The CAC40 bottomed out at twenty-five percent of value within three hours,” replied Gottlieb.
The room became deathly silent as the magnitude of the crash in French equities soaked in. More than one person in
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