Download Essay questions for Chapter 8

Essay questions for Chapter 8
1. The author of this book has devoted an entire chapter on Greece, referring to it as “The
epicenter of the Euro crisis.” Explain why Greece was so important in the European
sovereign debt crisis.
2. After Greece, Ireland was the second country to receive a bailout. Explain how the
country that had earned the title of “Celtic Tiger” for its rapid economic growth, and had
obtained the second highest per capita income in the EU, fell into such financial trouble that
a bailout from the EU and the IMF became necessary. Furthermore, explain why Ireland was
able to recover more quickly than any other bailout recipient country.
3. The third country to receive a bailout was Portugal. Discuss the factors that led Portugal
to the brink of bankruptcy and forced it to accept a bailout from the EU and IMF. Was the
bailout very effective in helping Portugal recover from the Euro crisis? Explain.
4. Although the Spanish government wanted to avoid a bailout, it finally succumbed and
signed a memorandum of understanding. Discuss the cause(s) of Spain’s financial distress.
Do you think the Spanish financial crisis is related to the crisis of any other EMU country? If
yes, name this other country and briefly describe how their financial crises were similar.
5. The last EMU country to enter the Euro crisis was the small island republic of Cyprus.
Cyprus‘s financial problems were closely related to another country. Name this other
© 2016 George K. Zestos
country and explain how Cyprus’ financial problems were triggered, or possibly caused, by
this EMU member state. Explain how the EU and the IMF handled the Cyprus financial crisis.
Were there any conditions imposed on Cyprus in order to receive a bailout that were not
imposed on any other bailout recipient countries? Explain.
6. Evaluate the EU policy approach of coping with the Euro crisis. Do you think the austerity
programs, as well as the requirement for bailout-recipient countries to follow the export-led
growth model of Germany, were the best way for these countries to restore fiscal stability
and promote economic growth? If not, were there any alternative approaches?
7. There is a common belief that the US subprime mortgage crisis spread in Europe via
contagion. However the chief economist at Freddie Mac, Frank Nothaft, provided evidence
that some EU countries had created their own housing bubbles. State whether you agree or
disagree with Nothaft. Develop your argument by referring to the empirical evidence that
was presented in section 8.1.
8. CRAs have been sued in the US and Europe for not providing accurate information to
investors regarding the quality of the securities they were asked to rate. Were CRAs careless
in providing information they were paid to provide? Present arguments supporting your
opinion about the role of the CRAs in the crisis, and whether you believe the accusations
against them are accurate.
9. CRAs were also accused of incorrectly rating countries’ government bonds. Is it possible
that this triggered or intensified the European sovereign debt crisis? Explain if such claims
© 2016 George K. Zestos
are based on facts, or are baseless accusations.
10. Explain the following terms employed by the CRAs when evaluating securities.
a. Investment;
b. Speculative/Junk;
c. Negative Watch.
Also state how the announcement of such terms (news) triggered the fomentation of the US
subprime mortgage and the European sovereign debt crises.
11. In July 2010, the US Congress passed the Dodd-Frank Act. The Act was designed to
regulate the financial activities that had fomented the US subprime mortgage crisis, and
promote financial stability. In 2014 and 2015 the US Congress passed new laws undoing
some of what the Dodd-Frank Act had accomplished. Explain if relaxing the Dodd-Frank Act
could generate new financial risks for the US economy.
12. Based on information in this chapter, can you provide advice to the EA member
governments on how to protect their countries from future financial crises? Would you
suggest any financial regulations in particular?
Suggested class debates
1. The US subprime mortgage crisis followed the burst of a housing bubble. A claim was
made that a similar bubble was also formed in Europe. The class will debate whether such
© 2016 George K. Zestos
housing and property bubbles were present in European countries. Discuss which European
countries developed housing bubbles and then state if the US played a major role in the
formation of the European sovereign debt crisis.
2. Students will debate the role of the CRAs in the formation of the US subprime mortgage
crisis and the European sovereign debt crisis. One group of students will support the view
that CRAs provided a necessary and useful service despite the criticism they received. The
other group of students will argue that the CRAs played a negative role in both crises. The
two groups should present various arguments for and against the CRAs.
3. With the exception of Spain, all bailout-recipient countries received a speculative/junk
rating by at least one CRA. The class will debate why Spain’s government bonds were not
downgraded to junk status. Also discuss if the CRAs are responsible for the crisis, and if so to
what extent.
4. Students will debate whether legislative amendments to the Dodd-Frank Act in 2014–15
by the US Congress pose a new threat to the financial stability of the US.
5. Students will debate why the crisis in Greece has continued for longer than in any other
country, and is not over yet.
© 2016 George K. Zestos