As the confrontation between Greece’s newly elected government and the European Union escalates, the country could run out of cash as early as this March. Earlier, on January 25, 2015, Greece’s radical left party, Syriza, became the first anti-bailout party to win elections in the Euro zone. Consequently, Prime Minister Alexis Tsipras is now refusing to accept more bailout packages, and rather demands the restructuring of outstanding debt. A request, which is openly rejected by Germany, the European Central Bank and the European Parliament. Depending on the undergoing negotiations between the sides, Greece could be left to deal with bankruptcy on its own. This is an attempt to understand what leads to a country’s default, and what happens afterwards.
Case studies of prior defaults in Argentina, Iceland and elsewhere in the world reveal some very interesting facts about the economy of a country, which is on the verge of bankruptcy. Maybe it’s time for as many people as possible to educate themselves on those issues, so either to avoid them, or even worse, deal with them. First off, the level of foreign debt soars above 100% of the country’s GDP; that is, a country owes the international community more than the total value of its products and services combined. Second, the level of the country’s short-term debt, i.e. debt that is due within 12 months, is one and a half times or more the value of its foreign reserves. Furthermore, the country’s exports fall short of compensating for this deficit.
In many cases, as the country moves closer to bankruptcy, inflation rate spikes, unemployment rate spirals, and obviously GDP substantially shrinks. In addition, the local currency in most cases is overvalued relative to the US Dollar, and possibly has a pegging history, which eventually collapses prior to the country’s default. Confronted with all of the above, governments usually respond by raising taxes beyond people’s limits as a last resort to tap for cash. As a result, the country experiences a painful mass exodus as the most educated, proficient and wealthy flee to more developed countries, leaving behind a cornered majority.
As the situation explodes beyond control, the government declares that it is unable to repay its creditors, and usually asks for some sort of restructuring. In Argentina’s case, the government initially offered to repay only 30% of its commitment to bondholders, but eventually paid a little more than 90%. In the prior Greek case however, bondholders received only 50% of their capital. While in a best case scenario, the government would stick to its commitments, but would ask for more time to do so. Meanwhile, financial institutions would be barred from transferring money abroad, banks could freeze all accounts for a given period of time and only allow minimal daily, weekly or monthly withdrawals, and in extreme cases financial institutions would be completely shut down to prevent capital outflow. Finally, power companies would stop working, gas stations would close, and food would disappear from stores.
As a result, the trapped majority would take on to the streets and channel their anger into their bankrupt government and its financial institutions. Confrontations with the police erupt and the country goes into further chaos. In Argentina’s case, the situation developed into a full civil war as the government declared a state of emergency and the country sank into unprecedented turmoil. So unprecedented that barter trade replaced cash, real estate prices dropped, people were killed in the streets, and the Argentinian president was forced to flee the presidential palace by helicopter and eventually resign then brought to trial.
Now back to Greece. If there is high probability the country could experience any of the above or a combination thereof, let alone being dropped out of the E.U., why would anyone risk their money investing a penny in Greece?! Remember, “cheap” is called so for a reason, and nothing can stop it from becoming “cheaper” and “cheapest”, yet this still doesn’t mean it’s worth your money. Well, at least until there are tangible signs of recovery. Otherwise, Greece would collapse, in which case the domino effect could swiftly spill over into Ireland, Spain and Portugal to mention a few.
[ad_2]Source by Amr Dabbous