Question

1.Consider two types of bonds in the market: US Treasury bonds and European Government Bonds (bonds issued by governments of countries in the European Union.). Also consider the Greek government-debt crisis happened in 2009. Use the figures of both bond market and market of loanable funds to illustrate the effect of the crisis on bond prices and interest rates of these two types of bonds. (20 points)

(Hint: recall the story of “a flight to quality”)

Answer 1

The Greek financial crisis was a series of debt crises that started with the global financial crisis of 2008.

The Greek financial crisis had two primary causes-

Government economic mismanagement, fraud and an absence of public accountability and economic imbalance that was ill suited to and inconsistent with its political and financial goals.

The most famous notion of crisis is the financial crisis which affected the financial markets and slowed down the global economy. The debt crisis deals with countries and their ability to repay borrowed funds. Therefore, it deals with national economies, international loans and national budgeting

With 2 Types of Bonds in the market, US TREASURY BONDS & EUROPEAN GOVERNMENT BONDS, We will understand the effect of crisis on the bond prices and the interest rates of these bonds-

• Due to the crisis, there were fiscal and macroeconomic imbalances, Thus the budget deficit got worse and as a result, the government will have to borrow more-- the State Treasury will have to issue more bonds. The supply of bonds (demand for loanable funds) will increase, bond prices will fall, and interest rates will rise.
  
• Due to the Crisis, the stock market crashed and slowed down, As a result, People’s wealth decreases, So savers would have less to save. Saver’s demand for bonds (and the supply of loanable bonds) decreases. This causes the price of bond to decrease and interest rates to rise.