Effect of Eurozone deal on money supply

An analysis article on the Guardian website lists six problems facing the Eurozone following the deal in which a pile of Greek debt will written down by 50 percent.

The problem which catches my attention is number five: that Europe’s banks could starve the economy of credit.

Europe’s banks have been told to take a more realistic view of the billions of euros worth of sovereign bonds they hold on their books, and make sure they’re holding enough capital to protect themselves against the risk of default by Greece, Portugal, Spain and Italy. They could do that by raising investment in the financial markets – from cash-rich states such as China, for example – or they could choose instead to repair their balance sheets by reducing their liabilities. That would mean calling in loans and depressing new lending to families and businesses throughout Europe – exactly the credit crunch eurozone politicians are so keen to avoid. Any such lending squeeze would be likely to exacerbate the slowdown that is looming: many economists already expected the European economy to slide into recession in the fourth quarter of the year.

When they talk about credit the really mean money supply.  One of the risks of this deal is that there may be a major reduction in the money supply in Europe and probably around the world.

This is serious. As well as having to cope with a slowdown because we are using resources at an unsustainable rate the economy may further depressed because their will not be enough money supply to facilitate the exchange which is still possible

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