{2!} points}1. Most of the excessive borrowing that built up in the Eurozone before the crisis was intermediated by banks. In non—Eurozone European countries that borrowed excessively during the...

{2!} points}1. Most of the excessive borrowing that built up in the Eurozone before the crisis was intermediated by banks. In non—Eurozone European countries that borrowed excessively during the boom, borrowing alsowas intermediated by banks, and the banks borrowed in foreign currencies. a. Consider the case where the excessive borrowing was by the Brivate sector [as in Ireland, Spain, andItaly}.If Ireland, Spain, and Italy had not belonged to the euro, banks in these countries likely wouldhave borrowed in a foreign currencylperhaps the euro]. Once the credit bubble burst, the balancesheets of these banks would have been under stress. {Assets on bank balance sheets would have lostvalue, and if asset values fall enough, these banks might have become insolvent. If Irelandl| Spainl| andItaly had not belonged to the euro their central banks would have been able to resort to printingmoney in order to bail out [rescue] the banks. Explain why the ability to print money might not havebeen enough for the central banks to address the crisis successfully. a. Consider the case where the excessive borrowing was by the government [pu blic sector borrowing}, asin Greece. Sugpose Greece had not ioined the euro. Likely, Greek banks would have borrowed in in aforeign currency {perhaps the eu ro], and then used the borrowed funds to buyr Greek governmentbonds. {i} Suppose the Greek government had suddenly decided to resort to printing money to “cover"its budget deficit. What would the impact of a sharply higher rate of money—printing be on in?ationand the exchange rate? [ii] Explain what would happen to Greek government bond prices in thisscenario {money-printing]. {iii} what would the impact be on Greek government bond prices ? {iv}Explain why the Greek government’s ability to print money would not have been enough to resolve theban king crisis. [2D points}2. Explain what Buiter and Sibert are saying in the following claim: "Iceland’s banking model was not viable. The fundamental reason was that Iceland was the mostextreme example in the world of a very small country, with its own currency, and with an internationallyactive and internationally exposed ?nancial sector that is very large relative to its GDP and relative to its?scal capacity." 2003 1E] 3D voxEu BUITER SIBEHT The collapse of Iceland’s banks.